(HRL) Snack-On: Hormel in the Menu

According to New York Times- Americans eat 31% more packaged food than fresh food and they consume more packaged food per person than their counterparts in nearly all other countries. A sizable part of the American diet is ready-to-eat meals, like frozen pizzas and microwave dinners and sweet or salty snack foods.

This probably doesn’t come as a surprise, given the country’s obesity rates. However, the surprise lies in analysts assigning a camouflaged tone of under-weight to these processed and packaged food company stocks, which has been dwindling investor confidence over quite some time.

Is Hormel Foods Corp (HRL) a prey to such a confusing situation?

The Industry Hitch

The trouble with quality food companies is that they rarely get cheap and when they do, they often erode away the fundamental aspect of quality. Notable troubles include pricey refrigerated business, where higher storage costs really hurt profits. On the raw material front, the hog prices look pretty firm on the upper layers whereas costs of pork, poultry and feed grains have been rowing upstream.

Big banners in food industry are hence, on the verge of losing their almost-legendary reliability.

In such a scenario, the cost restructuring program taken up strategically by Kellogg (K) and a few other companies was a brilliant reply to the worldwide rising raw material prices. But, unfortunately, there is not enough reason to think that the pricing situation is going to get better quickly. Thus it is hard to argue whether the stock prices will regain investor confidence over time.

The Hormel’s Advantage

In such a Scenario, Hormel holds a long term opportunity in processed and packaged foods, as the company has ample room to produce and display newer differentiated products on store shelves competing against the stronger market presence of Kraft (KFT) and Sara Lee (SLE). Also, to its advantage, Hormel expects a better margin for the coming quarters with a probability to enter ethnic food aisles, targeting the Hispanic market.

Indeed, Hormel’s quarter was sluggish compared to that of Sara Lee or Tyson (TSN). Revenue growth was a meager 2% with shooting costs, killing volume by 7%. Nevertheless, Hormel also succeeded in offsetting input cost inflation by lowering corporate expenses during the quarter.

Thus, positioned correctly, Hormel may continue to exploit the U.S market in consolidation with small tuck-in deals with brand stores, diving deeper into private food labels.

Greeting the Season

Allowing for the above pros and cons, the question crops up whether Hormel will be able to lead the food companies, get their lost honor back on investor platter–for a better season ahead.

The answer is Hormel is not overpriced, neither cheap at today’s prices. But the company’s value added quality products, its retail penetration and brand building strategies may earn it a favorable rationale to strengthen its growth profile and gain back investor confidence.

With all due considerations, Hormel will remain in our watch-list over the upcoming, over-eating season of Christmas and New Year. Hope to watch it boom!!

HORMEL FOODS CP (HRL): Free Stock Analysis Report

KELLOGG CO (K): Free Stock Analysis Report

KRAFT FOODS INC (KFT): Free Stock Analysis Report

SARA LEE (SLE): Free Stock Analysis Report

TYSON FOODS A (TSN): Free Stock Analysis Report

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