Why Hormel Foods Is Heading To New Highs In 2022

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Summary

  • Hormel Foods delivered blowout Q4 earnings earlier in December.
  • This earnings release has entirely reset the narrative around the company.
  • The company is heading for record revenues and profits in 2022. I expect the share price to follow suit.
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  • Hormel Foods (HRL) put up absolutely sensational Q4 numbers in its report out earlier this month. You may have missed the news, since Hormel isn’t exactly a hot stock, even by food and beverage industry standards. However, this story should be getting more attention, as Hormel’s earnings release was one of the most sensational of any stock in my coverage universe this year.

    The company absolutely crushed it this quarter, and shares put up a solid two-day rally immediately following the earnings release on Dec. 9:

    Chart
    Data by YCharts

    That’s a nearly 10% pop for the stock in two days. And it has subsequently continued to advance following that earnings report. If you’ve followed Hormel for long, you know it’s rare for HRL stock to move more than 5% on earnings. So what explained the market’s outsized reaction?

    One look at the numbers and I think you’ll see.

    Let’s start out with the eye-catching top-line figures. Hormel posted 14% organic sales growth year-over-year!

    You might be asking: “But what about the Planters acquisition?” Hormel did make one of its largest M&A moves ever in 2021.

    But no, this is organic sales growth. The actual total revenue growth was 43% year-over-year. Yes, you’re reading that right. A large staid food company’s revenues grew 43% vs. Q4 2020. Don’t believe me? Here’s the news clip highlighting it:

    Source: Seeking Alpha

    Of course, the Planters nuts acquisition constituted a big chunk of that revenue growth. Hormel utilized a good chunk of its balance sheet flexibility (it was previously debt-free) to execute a massive bolt-on acquisition and instantly put an end to its supposed earnings stall.

    Growth Massively Outpaces Inflation

    Back to the organic growth. Any company can grow revenues with an acquisition. Getting 14% growth on your existing products when you sell meat, nuts, and condiments is truly incredible.

    Some skeptic might come in and diminish these results by pointing to inflation. After backing out 6% inflation, “real” organic sales growth would be 8%.

    8% for a food company is still amazing. And, I’ll add, it goes to show how resilient Hormel is in the face of inflation. They can pass through virtually all their added costs to end customers with hardly any pushback.

    This is why I was complaining so loudly when the stock went down after the previous quarter’s results. It was patently obvious how this was going to play out.

    We’ve seen Hormel manage price shocks in pork, turkey, and avocados in recent years. This stuff always takes a few months to recalibrate. You can’t just raise prices on everything overnight; stores need time to clear out existing inventory before you can push through price increases. Once that’s done, however, you get the big margin boost as price increases fully take effect.

    And then, once that’s out the way, the ratchet effect dominates. This refers to the concept where a tool is designed to only turn in one direction. The same goes for screws as it does for consumer products prices. Once you turn the inflation ratchet, prices go up permanently. Try as you might, you’re never going to manage to untwist the inflation price ratchet. Once prices are increased, they stay locked in.

    Hormel’s costs should stabilize or even decline a bit in 2022 as things such as shipping prices are starting to revert more toward normal after hitting stunning peaks earlier this year. But while Hormel’s cost structures stabilize, the price increases it jammed through on its products aren’t going anywhere. That 30-cent raise to the price of canned chili, bacon, or almond butter won’t ever be rescinded.

    Growth On All Product Lines

    Let’s get back to the topline growth again. It wasn’t a fluke driven by one hot product, either. Rather, every single Hormel Foods business segment posted double-digit year-over-year growth. Every single one. Here’s the breakdown of sales by category:

    • Grocery Products: +18%
    • Refrigerated Foods: +41% (not a misprint)
    • Jennie-O Turkey Store: +23%
    • International & Other: +24%

    Everything that was a problem before has been resolved. Things such as low turkey prices and weak results from the Mexican foods division seem to have taken care of themselves. It’s funny what a little bit of generalized inflation and supply chain issues will do in terms of clearing up some weak pricing issues.

    Furthermore, management confirmed that this quarter wasn’t particularly out of line. Rather, Hormel’s demand and pricing trajectory has inflected upward over the past few months. This was so predictable in an inflationary environment but people didn’t believe it until they saw the results. Hence why the stock has moved so sharply on this earnings release; it has reestablished Hormel as a strong growth play in the food industry with a favorable margin structure.

    In any case, Hormel raised its earnings and revenue guidance for 2022. The company now sees revenues of more than $12 billion next year (vs. $10 billion or so run-rate prior to COVID-19). The company also forecasts earnings of above $2 per share in 2022, which will be up 20% or so from recent years.

    I’ve been repeating it for months now, just wait until the Planters acquisition hits results and turkey prices go up. The market was impatient, however, and sold HRL stock off on exceptionally short-lived problems. Now, though, the problems are gone, and earnings are heading to new record highs:

    Hormel earnings estimates. Recall that it was earning around $1.70 per share annually up until now. | Source: Seeking Alpha

    Even these estimates are likely too low, as analysts haven’t finished updating their models post Q4-earnings. Hormel, after all, just raised 2022 guidance to a midpoint of $2.03, and management has suggested it can deliver a 10% CAGR on earnings going forward in the 2020s. Thus, the 2022 estimate is too low by around at least a nickel, and by 2024 we’re closer to $2.40 or $2.50 per share in earnings, rather than the $2.30 that analysts are currently looking to. In any case, earnings are going up – a lot – in the near future.

    What’s a Dividend Aristocrat with a great balance sheet and best-in-class management team worth? Probably more than the current valuation, especially when staples companies with low growth are trading at 25x earnings. Something like Procter & Gamble (PG) is now at 27x earnings to give one example. It’s nuts to have Hormel at a double-digit growth rate trading at a lower P/E ratio.

    Hormel traded for 25-30x earnings for much of the 2010s. Quality companies usually earn a premium, after all. The stock is still selling at a discount to both its historical median and its broader industry. All that while its earnings growth has flipped into high gear. HRL stock is still offering a dividend north of 2%, which is at the high end of its historical range:

    Chart
    Data by YCharts

    The stock has moved up from its ridiculously cheap levels it traded at in October. But let me reiterate, Hormel is still a relative value in an overpriced market. This should be a $55-$60 stock in 2022, and in the meantime, it remains a low-risk Dividend Aristocrat with one of the best management teams in America. Hard to beat that.

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