Solid Execution Is Helping Narrow-Moat Hormel Navigate a Challenging Environment

Business Strategy & Outlook

The Hormel’s narrow moat is secured by a strong portfolio of brands with demonstrated pricing power, entrenched retail relationships due to the firm’s number-one and -two positions in several categories, and a position as one of the leading providers of proteins to the food-service industry, differentiating itself by servicing these clients with its own salesforce. The long-term transition from a commodity protein producer to a branded consumer product company has served Hormel well, helping to stabilize prices and demand for its strong brands.

While competitive pressures are unlikely to abate, the firm is working to stabilize its competitive position. Hormel has shifted its mix to include more on-trend fare (Applegate natural and organic meats and cheeses, snacking platforms, Hispanic offerings, and labor-saving products for food service, to name a few). As a key part of its strategy to expand into snacking, Hormel acquired Planters from no-moat Kraft Heinz for $3.4 billion in 2021. While Planters has suffered from underinvestment the past few years, Hormel is funneling additional resources to enhance innovation and marketing, which will help stabilize the brand’s market share. In 2022, Hormel will take another step to reduce its mix of commodity sales from 10%-15% of revenue currently, by 5%-10%. It will shed $350 million (3% of sales) of commodity pork revenue as well as non-value-added turkey sales (to be quantified during the first-quarter report). These efforts, which should enhance profit margins, reduce volatility, and further support Hormel’s competitive edge as its strong brands become a greater portion of the mix. The Hormel has a significant opportunity to expand its businesses internationally, as only 8% of revenue is from outside the United States currently. Spam and Skippy both have international appeal and are being launched globally. Also, the acquisition of Ceratti, a Brazil-based producer of deli products, gives Hormel access to the fast-growing Brazilian market. The Hormel can use this business as a foundation to launch its legacy brands across Latin America.

Financial Strengths

Hormel has a long tradition of a conservatively managed balance sheet, with average debt/adjusted EBITDA of just 0.5 over the last decade compared with the peer average of around 3.0. Therefore, the $3.4 billion Planters acquisition does not strain the balance sheet, taking leverage to a very manageable 2.3 times for fiscal 2021 (and 1.9 times using net debt), falling to below 1 in 2024 and beyond.

Hormel’s free cash flow (cash flow from operations fewer capital expenditures) as a percentage of revenue averaged 7% over the past three years, compared with 10% for its peer set. This metric has increased as the company has focused on shortening its cash-conversion cycle, and to continue to improve to 10% over the next five years. Hormel’s priorities for cash are dividend increases, reinvesting in the business through capital expenditures and acquisitions, and opportunistic share repurchases. The company has an impressive record of increasing dividends consecutively for 56 years and remains committed to maintaining this trend. The forecasted annual dividend increases (averaging a mid-single-digit clip) and expect the company to maintain a 50% payout ratio. While anticipate that the firm will remain a consolidator, No one can include any unannounced future tie-ups given the uncertainty surrounding timing, nature, and terms. Rather, the model that the company engages in share repurchases (forecasting a 1% reduction in shares outstanding on average annually over the next 10 years), spending a view as prudent if completed at a discount to assessment of the firm’s intrinsic value.

Bulls Say

Hormel is a well-managed company with a demonstrated ability to extract value from acquisitions, maintain financial discipline, and prioritize shareholder interests.

Hormel is embarking on a large international expansion, which should allow it to capitalize on its brand equity as it customizes its mix to align with regional preferences.

Jennie-O Turkey has experienced several challenges, with three-year average operating margins of 7%, but steps to overhaul the segment should return profitability to the low-double-digit rate of long term.

Company Description

Hormel Foods is a protein-focused branded food company. Its brands include its namesake Hormel, Spam, Jennie-O, Dinty Moore, Applegate, Wholly Guacamole, and Skippy. The vast majority of the company’s revenue is U.S.-based: 64% U.S. retail, 28% U.S. food service, and 8% international. By product type, in fiscal 2021, 23% of revenue was shelf-stable foods, 18% was poultry (branded and commodity), 55% was other perishable food, and 3% was other, primarily nutritional products. The company holds the number-one market position in shelf-stable meat, shelf-stable ready meals, pepperoni, natural/organic deli meat, and guacamole and the number-two position in turkey, bacon, chilled ready meals, and peanut butter.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.