Investing in the food industry requires a discerning eye for companies that demonstrate not only stability and growth potential but also a track record of adapting to evolving consumer tastes. Hormel Foods Corporation, a well-established player in the food industry, exemplifies these qualities. With a rich history spanning over a century, Hormel has consistently demonstrated its ability to innovate and diversify its product portfolio. But is it also a good investment? It is the topic I will investigate in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Hormel. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I do not own any stocks in any of Hormel's direct competitors either. Thus, I have no personal stake in Hormel. If you want to purchase shares or fractional shares of Hormel, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
The Business
Hormel Foods Corporation was founded by George A. Hormel in 1891 in Minnesota, United States. Hormel Foods Corporation is a renowned American food company recognized for its wide range of meat and food products. These include canned meats such as Spam, canned stews, deli meats, bacon, peanut butter (sold under the Skippy brand), and various other food items across over 40 different brands. Hormel operates in three segments: Retail, primarily involving the processing, marketing, and sale of food products sold mainly in the retail market. Foodservice, primarily involves the processing, marketing, and sale of food and nutritional products to customers in the foodservice, convenience store, and commercial sectors. And International, which is responsible for processing, marketing, and selling Company products on the international market. This segment also includes the results from the company's international joint ventures, equity method investments, and royalty arrangements. The retail segment is the largest contributor, accounting for approximately 64% of net sales, but only 47% of the profits. The foodservice segment is the second largest, accounting for approximately 30% of net sales and 48% of profits, demonstrating its high margins. International contributes approximately 6% to net sales and 5% to profits. Hormel's products are popular in the United States, with 84% of all U.S. households purchasing them. This gives Hormel a moat, although it is not as strong as desired due to the limited pricing power within their industry.
Management
Their CEO is Jim Snee. He joined Hormel in 1989 and took on roles with increasing responsibility across its divisions until he became the CEO in 2016. He also serves as the President and Chairman of the Board at Hormel. Jim Snee earned a Bachelor of Arts degree in Marketing from New Mexico State University and a Master's degree in Business Administration from the University of St. Thomas in St. Paul. He has also taken part in executive leadership and management programs at Harvard Business School. Jim Snee is the 10th president and chief executive officer in the company's history. During his tenure as CEO, he has led the company's ongoing transformation into a global branded food company and its increasing recognition as an award-winning corporate citizen by emphasizing the quality of the company's food products and their impact on the world. Under Jim's leadership, the company has been recognized for its achievements. It has been listed on the “Global 2000 World's Best Employers” by Forbes magazine for three consecutive years, acknowledged as one of Fortune magazine's most admired food companies, included in Corporate Responsibility Magazine's “The 100 Best Corporate Citizens” list, and honored as one of America's Most Responsible Companies by Newsweek, among other accolades. In 2021, Jim received an honorable mention as one of the most responsible CEOs by PR Week Magazine. Under his leadership, Hormel has continually expanded its product portfolio through organic growth and acquisitions. In my opinion, one of the most interesting expansions is the acquisition of Planters snack nuts business, which is enhancing the Company's presence in the growing snacking space. I believe that Jim Snee's credentials and actions show that he is the right person to lead Hormel moving forward.
The Numbers
The first metric we will investigate is the return on invested capital (ROIC). I would like a 10-year history demonstrating a minimum annual growth of 10%. Hormel has historically achieved a Return on Invested Capital (ROIC) above 10% in most years. However, it is concerning that the ROIC has decreased recently, and Hormel has not been able to achieve a ROIC above 10% since 2020. It is worth noting that factors such as the Planters acquisition and macroeconomic conditions have influenced the ROIC in the past three years. Although the numbers have not exceeded 10%, they still remain in the high single digits. Nonetheless, I would like to see much higher numbers in the future if I were to invest in Hormel.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. These figures are much more encouraging than the ROIC. Hormel is a textbook example of how you would like to see equity growing in a company, as equity has increased every year for the past 10 years. The growth rate isn't as high as it was before, but I'm not worried about it because the most important thing is that Hormel is growing its equity every year.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that the margin provides a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising to note that Hormel has consistently generated positive free cash flow every year for the past decade. Free cash flow has remained relatively stable over the years despite acquisitions, a pandemic, and high inflation. However, as we observed with ROIC, the levered free cash flow margin has decreased recently, and fiscal year 2023 recorded the lowest levered free cash flow margin since 2014, which is somewhat concerning. However, the free cash flow yield is the second highest in the past decade, indicating that the shares may be trading at a decent valuation. We will revisit this later in the analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to determine if a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After analyzing Hormel's financials, I found that the company has 2,97 years' worth of earnings in debt. It is below the three-year threshold, which means that debt isn't a concern for me. It is also worth noting that the debt is now at its lowest level since the acquisition of Planters, which indicates that the management prioritizes debt repayment.
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Risks
Based on my findings so far, I find Hormel to be an intriguing company. However, no investment is without risk, and Hormel also has its fair share of risks. One risk is macroeconomics. Macroeconomic factors, such as high inflation, affect Hormel because the company may not be able to pass the extra costs on to consumers, as their products have limited pricing power. Furthermore, high inflation also results in higher wages. With approximately 20.000 active employees, this will impact Hormel's profitability. It is evident when looking at the operating margin, which has decreased to 8,7% in fiscal 2023, the lowest in a decade. Inflation and other macroeconomic factors may also lead to a decrease in consumer spending rates and shifts in consumer product preferences, which could negatively impact Hormel.
Another risk is competition. In its annual report, Hormel mentions that the production and sale of meat and food products in the U.S. and internationally are highly competitive. Hormel competes with manufacturers of pork and turkey products, as well as national and regional producers of other meat and protein sources, including beef, chicken, fish, nuts, and plant-based proteins. Furthermore, Hormel's products have low pricing power, which means that if competitors lower their prices, it will affect Hormel's profitability, as consumers will likely choose the lower-priced product.
Customer concentration. Hormel's sales to its largest customer, Walmart Inc., accounted for approximately 15% of consolidated gross sales. Walmart is a customer of the company's Retail and International segments. Hormel's top five customers collectively account for approximately 36% of consolidated gross sales. Therefore, the loss of one or more of the top customers in any of the reportable segments could significantly impact Hormel's financial results.
Reasons to invest
There are also numerous reasons to invest in Hormel. One reason is the Foodservice segment. The foodservice segment has the highest profit margins. Management has stated their dedication to continuing the expansion of Hormel's leadership position in the foodservice industry. They have also mentioned their expectation of continued growth in the foodservice segment, expressing confidence in their ability to accelerate growth in key categories such as bacon, pepperoni, prepared proteins, and turkey. Furthermore, they can establish a digital leadership position in the industry and expand their presence in the convenience store channel. Therefore, if management succeeds, it will lead to higher profitability .
The international segment. Management has indicated that Hormel must proactively expand its global presence, beginning with revitalizing growth in its international business. Furthermore, management has stated that they anticipate the international business to resume experiencing accelerated growth. One area that is expected to drive international growth is the improvement in Hormel's business in China, particularly in the Foodservice and Retail sectors. Management anticipates that this improvement will gain momentum throughout fiscal 2024. Hormel has also recently invested in Indonesian company Garudafood, which enables Hormel to expand its presence in high-growth regions in Southeast Asia.
Growing dividends. By the end of fiscal year 2023, Hormel had paid its 381st consecutive quarterly dividend. Furthermore, they increased their dividends by 3% at the end of the fiscal year 2023, resulting in Hormel has raised its dividends for the 58th consecutive year. The dividend seems secure because the company is a dividend king, and management has expressed commitment to dividend growth.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1,45, which is from the fiscal year 2023. I have selected a projected future EPS growth rate of 13%. Finbox expects EPS to grow by an average of 13% in the next 5 years. Additionally, I have selected a projected future P/E ratio of 26, which is double the growth rate. This decision is based on Hormel's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $31,63 We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Hormel at a price of $15,82 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.101, and capital expenditures were 258. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 181 in our calculations. The tax provision was 221. We have 546,599 outstanding shares. Hence, the calculation will be as follows: (1.101 – 181 + 221) / 546,599 x 10 = $20,87 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Hormel's free cash flow per share at $1,42 and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is $20,47.
Conclusion
I find Hormel to be an interesting company with excellent management. Hormel is currently facing some short-term headwinds due to macroeconomic factors, as evidenced by the decreasing margins. However, macroeconomics should eventually improve; the question is just when. Competition will always pose a risk for Hormel due to the weak moat and the lack of pricing power in their products. Consumers are likely to choose alternative products if they are sold at significantly lower prices. There is no indication that Walmart or any of Hormel's other major customers will cease selling Hormel products. However, it is still important to monitor this situation when investing in Hormel, as the loss of a major customer would have an impact on Hormel's business. I appreciate Hormel's expansion of their high-margin Foodservice segment and the numerous opportunities for international growth, especially considering the relatively small size of the international segment. Hormel also seems like a safe bet when it comes to dividends, as it is a dividend king and management has been very vocal about prioritizing dividend growth. Nonetheless, I am concerned about the simultaneous decrease in both ROIC and margins, and when combined with the relatively weak moat, I have decided not to invest in Hormel.
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