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Hormel Foods Sends A Message To The Market Hormel Foods (NYSE: HRL) did not have a bad quarter or even give poor guidance but the Q2 results are a message for the market. Not only is inflation cutting...

By Thomas Hughes

entrepreneur daily

This story originally appeared on MarketBeat

MarketBeat.com - MarketBeat

Hormel Foods Falls On Inflation Concerns

Hormel Foods (NYSE: HRL) did not have a bad quarter or even give poor guidance but the Q2 results are a message for the market. Not only is inflation cutting into volume sales and profits but even higher prices are on the way for US consumers. The key takeaway is that margins remain under pressure despite top-line growth and the outlook for earnings is weakening. In the case of Hormel, it means investors can buy more of this highly-valued dividend grower at a cheaper price, and even lower prices may be coming. Trading at 24X its earnings this stock is still among the highest-valued in the Consumer Staples sector and it pays one of the lowest dividends so we don't think the market is going to rush in to support prices.

Hormel Foods Falls On Solid Quarter

Hormel Foods had a solid quarter but the results are underpinned by higher pricing. While the net revenue grew 18.8% to a record $3.1 billion the volume fell by 2% and 8% on an organic basis. The good news is that revenue beat the consensus by roughly 10% and the strength more than carried through to the bottom line. On a regional basis, US Foodservice led with a gain of 32% followed by a 15% increase in US Retail and offset by a 3% decline in International sales. On a segment basis, Grocery led with a gain of 19% and was followed by a 16% increase in Jenny-O Turkey, a 3% increase in Refrigerated products, and a 1% decline in International. In all cases but one, refrigerated, there was a double-digit decline in volume offset by pricing increases put in place over the past year.

Moving on to the margin, the news is both good and bad. The company's pricing actions are resulting in sequential increases but still trailing inflation. The operating margin improved by 30 basis points sequentially but is still down 30 basis points versus last year. The good news is that the operating margin is better than expected and left the GAAP EPS up 21.2% versus last year, the bad news is that inflationary pressures are strong enough that the company tightened its guidance for FY earnings. Turning to the guidance, Hormel reiterated its outlook for revenue but tightened the top-end of its EPS range by 300 basis points. The takeaway, however, is that both revenue and earnings guidance is favorable to price action despite the reduction.

"We are confident in our ability to deliver our sales guidance, given robust demand for our brands across the retail, food service, and international channels, improvements in our supply chain, our investments in capacity and from strategic pricing actions. From an earnings perspective, we expect a strong finish to the year from our Refrigerated Foods business. We anticipate a fourth-quarter improvement from pricing actions taken across our Grocery Products portfolio," said Jim Snee, Chairman, and CEO of Hormel Foods.

The Technical Outlook: No Support For Hormel Foods

As solid a company and dividend payer as Hormel Foods is, the analysts are giving the stock little to no support. The consensus rating is only a Hold and the price target is barely above the current price action so not likely to aid the share price in the near term. The more likely scenario is that price action will continue its downward movement with a possible bottom in the low $40 range. At that level, Hormel will still be a highly valued stock but one trading at a more reasonable 21X earnings and paying a slightly higher yield.
Hormel Foods Sends A Message To The Market

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