Hormel (HRL) Growth Prospects Hit by Dismal Turkey Prices

We issued an updated research report on the premium meat products company, Hormel Foods Corporation HRL, on Feb 27, 2017.

Since the release of first-quarter fiscal 2017 earnings on Feb 23, shares of this Zacks Rank #3 (Hold) stock recorded a loss of 1.81% – broader than the loss of 0.89% incurred by the Zacks categorized Food-Meat Products industry.

Dismal turkey prices have been hurting the industry as well as the company’s Jennie-O Turkey Store business. However, we believe that sturdy market response of the company’s major branded products and new investments would propel growth, and partially offset the impact of existing headwinds.

Existing Scenario

Hormel Foods’ bottom-line performance in fiscal first quarter was hurt due to challenges faced by the Jennie-O Turkey Store segment. Depressing turkey prices, extensive competition and escalating overall operating expenses are the three major headwinds hampering this segment’s margin.

Hormel Foods also mentioned that its turkey prices (especially turkey breast meat) hit a seven-year low in fiscal first quarter. The turkey market has been facing an oversupply situation and is unlikely to witness any price hike any time soon. On the other hand, operating cost of the Jennie-O Turkey Store segment has been flaring up due to poor yield accrued from certain plant operations and maintenance required for certain bio-security measures. In addition to this, intense competition is triggering price pressure in the segments’ food service, retail as well as daily business chains. Management expects these headwinds to drag down its overall fiscal 2017 earnings. Therefore, the company trimmed its fiscal 2017 earnings guidance to the range of 1.65–$1.71 per share from $1.68–$1.74 per share. Also, a stronger U.S. dollar might continue to hurt the company’s overseas market revenues and profitability.

However, Hormel Foods intends to boost its revenues on the back of its strategically balanced business model that seeks to form a diversified product portfolio. The company believes that higher demand for popular brands such as Hormel Gatherings, Hormel Pepperoni, Hormel Natural Choice, CytoSport protein products, Wholly Guacamole, Herdez, and SKIPPY would bolster the company’s revenues in the near term. Additionally, increased fresh pork supply export and higher grain prices are likely to drive the company’s revenue growth trajectory in the quarters ahead.

Moreover, Hormel Foods plans to incur capital expenditure worth $200 million in fiscal 2017. Through these investments, the company intends to roll out new products, conclude plant construction in China, expand several capacities for value-added products and make new investments for food safety. Notably, management plans to achieve 15% top- and 10% bottom-line growth by 2020 on the back of higher innovation and diligent growth programs. The company is also committed toward its shareholders and augments their returns through lucrative dividends.

Stocks to Consider

Some better-ranked stocks worth considering within the industry include:

Tyson Foods, Inc. TSN has an average earnings surprise of +6.79% for the last four quarters and currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Hershey Company HSY presently holds a Zacks Rank #2 and has an average earnings surprise of +7.85% for the trailing four quarters.

Conagra Brands, Inc. CAG also carries a Zacks Rank #2 and has an average earnings surprise of +13.30% for the past four quarters.

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