Hormel’s Brand-Based Moat Supports Stable Free Cash Flow to Fund Its Consistently Growing Dividend

Revenue segments as reported by the company.

Retail

Foodservice

International

Grocery Products

Refrigerated Foods

Jennie-O Turkey Store

International & Other

Revenue Segments

Revenue is the money generated from normal business operations. Gross Profit is revenue minus cost of goods sold. Operating Income is revenue minus cost of goods sold and other operating expenses.

Revenue

Gross Profit

Operating Income

Revenue & Operating Income

Net Income, also called net earnings, is calculated as revenue minus cost of goods sold, operating expenses, depreciation, interest, taxes, and other expenses.

Net Income

Gross Profit, Operating Income, and Net Income as a percentage of Revenue

Gross Margin

Operating Margin

Profit Margin

Margins

An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

Selling, General and Administrative

Equity in Earnings of Affiliates

Operating Expenses

Year over year growth in Revenue and Operating Expenses.

Revenue Y/Y

OpEx Y/Y

Growth

Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.

Outstanding Shares

Market Cap

Also known as Price/Sales Ratio. Calculated using Average market cap for the quarter / Annualized quarterly revenue.

Revenue Multiple

Hormel Foods has long been on U.S. shelves, with strong meat-centric brands like Jennie-O, Spam, Dinty Moore, and various Hormel-branded goods. These brands tend to hold number one or two share in their categories. To keep pace with evolving trends, Hormel has expanded its focus through acquisitions of non-meat protein brands like Skippy and Planters and branded meat products like Applegate. It has also entered ethnic and emerging food with Wholly Guacamole, Herdez, and Happy Little Plants. Concurrently, Hormel has reduced its commoditized farming footprint, increasingly relying on third-party farmers. Taken together, we think these moves stabilize its competitive standing and improve profitability in the competitive packaged food arena.

But selling food isn’t easy, with inflation, avian flu, and supply chain bottlenecks as some recent headwinds. Hormel has used price increases and cost-cutting to offset these risks. Though we expect these challenges to ebb and flow over time, resulting in our stable long-term outlooks for sales growth and operating margins (2% and 13%, respectively), near-term volatility can still be drastic. For example, in 2021, organic revenue growth of 14% amid strong demand was offset by a 160-basis-point contraction in operating margin within surging input cost inflation.

In 2023, Hormel reorganized toward the customer channel (retail, food service, and international) rather than by product to streamline sales and improve cross-selling. Customers will now deal with one salesperson. However, we think this may lead to reduced transparency of performance at a detailed level and potential internal tension among product teams.

Retail is about two thirds of revenue at high-single-digit operating margin. Much smaller but more profitable, food service is about 30% at a midteens margin. We see low-single-digit sales growth for both, with retail leveraging brands and food service capturing untapped markets. Additionally, we think the two together create demand diversification, as seen when the pandemic hurt food service but greatly benefited retail, and a proving ground for testing innovation within food service that can be taken to retail.

Business Strategy & Outlook

We assign Hormel Foods a narrow economic moat rating based on intangible assets stemming from its strong brands and entrenched relationships with retailers and food-service companies. Leading brands include Spam (claiming the top spot with 50%-plus market share in the $2.4 billion shelf stable meat market versus just 9% share for private label), Applegate Farms and Jennie-O (number three and number four brands, respectively, with a combined 5% share in the $8 billion chilled processed poultry market dwarfed by the 11% share for private label), Skippy (number two with 18% market share in the $2.8 billion nut- and seed-based spreads market consistent with the 18% share held by private label), and Planters (which boasts leading branded share at 17% in the $8.1 billion nuts, seeds, and trail mixes market, though this is eclipsed by the 33% share private label has amassed).

The moat is evident through its returns on invested capital consistently exceeding our estimate of its cost of capital. Even in 2021 and 2022 when avian flu struck and input cost inflation rose before the company could adjust its prices, it still earned double-digit returns. With price increases having now taken effect, we expect economic returns to migrate back to the low-teens range, lower than the 20%-range that the company has historically earned but still well above our estimate of its cost of capital of about 7%.

As anecdotal evidence, we performed some channel checks to measure potential pricing power. Spam sells for 15% higher than private label, Planters peanuts sell for 25% higher (likely capturing the premium end of the market given its high price and lower market share than private label), and Skippy peanut butter for 21% higher. Admittedly, this isn’t perfect evidence of pricing power, but we think it indicates willingness to pay higher prices among end-customers.

Hormel’s continued transformation to a branded food firm, as it has deprioritized commoditized fresh meat, has enhanced its moat. With no brand differentiation, raw meat producers are often price takers that are more exposed to commodity price fluctuations and general supply/demand dynamics, as consumers tend to make purchase decisions based on price rather than brand. In comparison, food producers with established brands command pricing power with their customers. As evidence, Hormel generates high-teens into low-20% gross margin, compared with high-single-digits gross margin for meat producer Pilgrim’s Pride, low-double-digits for Tyson Foods, and midteens for private-label food companies like Treehouse Foods. This requires investment to stay at the forefront of changing customer tastes, as Hormel’s R&D expense as a percentage of sales of about 30 basis points compared with 20 basis points for Tyson and less than 1 basis point for Pilgrim’s Pride.

Additionally, Hormel’s typical advertising expenses, usually less than 2% of sales, is well below the industry average of more than 4%. But this hasn’t led to a deterioration in its brand intangible assets as market shares for core brands like Hormel, Spam, and Jennie-O have seen market shares rise at this level of spending. Hormel’s core brands carry enough lasting power that they don’t need as much advertising spending to remain strong within their categories.

Hormel’s relationships with both retailers and food-service operators are another key to its intangible assets. Buoyed by leading brands in several categories and an established distribution network, Hormel guarantees its placement in-store despite shelf space limitations and online at the top of searches and pages. This is particularly important because it helps Hormel launch new product innovations (which in turn drives excitement and strengthens retailer relationships) and expand distribution of acquired brands across its national footprint—breadth that a new entrant doesn’t have or would have to pay to access. The importance of distribution can’t be understated—it’s costly, time consuming, and difficult to recreate these relationships in the fragmented retail channel. Arguably, the frequent acquisition of smaller, emerging brands is evidence of how hard it is to replicate that scale.

Similarly, Hormel can leverage its relationships with food-service operators to launch products that fit their changing needs. For example, 2022 food-service sales grew 20% as Hormel was able to offer foods that required less preparation given customers’ labor shortages. Existing relationships put the company in a position to continue to gather insights quickly and sell corresponding products widely. Moreover, these operators are willing to pay for these innovations, as evidenced by the higher margins Hormel earns in this segment.

We think Hormel’s capital allocation strategy has largely supported its moat, both through inorganic and organic growth. For example, acquisitions of Skippy peanut butter, Justin’s nut butters, and Planters expanded it into branded non-meat protein, adding about $11 billion in opportunity in nut spreads and snacking nuts compared with just $2.4 billion for shelf-stable meat. The company’s positioning in the deli space was enhanced by the acquisition of Columbus, a premium deli company that complemented its offerings and expanded into a market where branding is possible. Organically, Hormel has captured the on-the-go trend with several product innovations, including Skippy (P.B. Bites, P.B. & Jelly Minis), which helped the brand increase points of distribution by 30% from 2013 to 2018. We view this as an impressive feat given that Skippy had previously been owned by wide-moat Unilever and likely benefited from its own retail relationships. 

Although Hormel’s dedicated salesforce provides some benefits, we don’t think it is a source of competitive edge. Competitors Tyson and Smithfield Foods forgo their own salesforce in favor of brokers. Hormel argues that its dedicated salesforce allows it to witness firsthand the challenges their clients face, allowing for unique insights to create innovative products to meet these needs. Additionally, the company believes it fosters stronger relationships with clients and distributors. Although there may be some argument that it has helped with Hormel’s success in the food-service industry, we don’t think this is an inimitable competitive advantage. Even though Tyson and Smithfield appear to have no plans to launch their own salesforce currently, we think capital is probably the largest roadblock if they were to switch strategies.

We refrain from assigning Hormel a wide moat due to the uncertainty around both its competitiveness and the food landscape beyond 10 years. Competing in a highly competitive food industry, we cite a few reasons that support our assessment. First, Hormel’s strongest brands still tend to be tied to its historical meat focus. Although its expansion into other categories is reducing its exposure to categories where pricing power remains elusive, there hasn’t been enough progress to establish multicategory leadership that we see in other wide-moat food names like Kellogg. Second, its strongest brands don’t carry far-away dominance like wide-moat Hershey does in chocolate, for example. Third, unlike wide-moat Mondelez, Hormel’s strength is exclusively tied to its home U.S. market. Demonstrable brand power across many markets would give us more comfort of the staying power of its competitive advantages. Lastly, we don’t see any additional moat sources to strengthen Hormel’s overall moat, as we don’t see benefits from scale in either purchasing or production processes.

Narrow

Economic Moat

Hormel Foods

Skippy is a brand of peanut butter manufactured in the USA. First sold in 1932, Skippy is currently manufactured by Hormel Foods, which bought the brand from Unilever in 2013.

Skippy

Applegate is a producer of high-quality natural and organic hot dogs, bacon, sausages, deli meats, cheese and frozen products. Products are made without GMO ingredients and sourc meat from farms.

Applegate

Spam is a brand of canned cooked meat made by Hormel Foods Corporation. It was first introduced in 1937 and gained popularity worldwide after its use during World War II. By 2003, Spam is sold in 41 countries on six continents and trademarked in over 100 countries (except in the Middle East and North Africa). In 2012, the eight billionth can of Spam was sold.

Spam

Hormel Foods Corp. engages in the production of meat and food products. It operates through the following segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International and Other. The Grocery Products segment focuses on the processing, marketing, and sale of shelf-stable food products sold in the retail market. The Refrigerated Foods segment is involved in the processing, marketing, and sale of branded and unbranded pork, beef, and poultry products for retail, foodservice, deli, and commercial customers. The Jennie-O Turkey Store segment includes the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers. The International and Other segment manages Hormel Foods International, which manufactures, markets, and sells company products internationally. The company was founded by George A. Hormel in 1891 and is headquartered in Austin, MN.

Earnings data Q2 2023

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Cameco

Clorox

Cummins

Kinder Morgan

Raytheon Technologies

Exxon Mobil

With Federal Reserve chair Jerome Powell effectively setting the stage for a challenging environment in the equities sector, investors ought to consider the most relevant blue-chip stock picks to beat the September market slump. As well, it's not just Powell creating rumblings in the investment space.

7 Blue-Chip Stock Picks to Beat the September Market Slump

Hormel Foods Corp. ( HRL , Financial) is a consumer packaged foods company that develops, processes and distributes various meat, nuts and food products to retail, foodservice, deli and commercial customers on a global basis. It provides various perishable products such as fresh meats, frozen items, refrigerated meal solutions, sausages, hams, guacamoles and bacon.

Hormel Foods: A Quality Food Producer, but Overvalued

Hormel Foods' (HRL) third-quarter top and bottom lines increase year over year. While management raises its sales view for fiscal 2022, it lowers its earnings per share guidance.

Hormel Foods (HRL) Q3 Earnings Lag Estimates, Revenues Up Y/Y

Dividend King Hormel retreats to support where it may fire off the next strong trend-following signal of its ongoing 14-year uptrend.

Hormel Looks Cheap At These Levels

Colgate-Palmolive

Federal Realty Investment Trust

Genuine Parts

Johnson & Johnson

Coca-Cola

Procter & Gamble

September is here and, apparently, so is the return of the bear market. This time, if there is not a stand by the bulls at the 3,900 level on the venerable S&P 500, then we could be on our way to test the June market lows.

Why 7 Analyst Favorite Dividend Kings Could Be Huge Bear Market Winners

Hormel Foods Corporation (NYSE:HRL ) Q3 2022 Results Conference Call September 1, 2022 9:00 AM ET Company Participants David Dahlstrom - Director of Investor Relations Jim Snee - Chairman, President and Chief Executive Officer Jacinth Smiley - EVP and CFO Conference Call Participants Rupesh Parikh - Oppenheimer Ben Theurer - Barclays Ken Zaslow - Bank of Montreal Tom Palmer - JPMorgan Robert Moskow - Credit Suisse Michael Lavery - Piper Sandler Jim Salera - Stephens Peter Galbo - Bank of America Adam Samuelson - Goldman Sachs Operator Good morning, everyone, and welcome to the Hormel Foods Third Quarter 2022 Earnings Webcast and Conference Call. All participants will be in listen-only mode.

Hormel Foods Corporation (HRL) Q3 2022 Earnings Call Transcript

Hormel (HRL) delivered earnings and revenue surprises of -2.44% and 1.14%, respectively, for the quarter ended July 2022. Do the numbers hold clues to what lies ahead for the stock?

Hormel Foods (HRL) Q3 Earnings and Revenues Miss Estimates

Shares of Hormel Foods Corp. HRL, -0.75% dropped 4.3% in premarket trading Thursday, after the branded food company raised its full-year sales outlook but cut its profit view, citing expectations that high cost inflation will persist. The company also reported fiscal third-quarter net income to the quarter to July 31 that rose to $218.l9 million, or 40 cents a share, from $176.9 million, or 32 cents a share, in the year-ago period.

Hormel Foods stock drops after profit miss and outlook lowered, while sales guidance was raised

The company delivers its seventh consecutive quarter of record sales  and fourth consecutive quarter of earnings growth  AUSTIN, Minn. , Sept. 1, 2022 /PRNewswire/ -- Hormel Foods Corporation (NYSE: HRL), a leading global branded food company, today reported results for the third quarter of fiscal 2022.

HORMEL FOODS REPORTS THIRD QUARTER RESULTS AND REVISES FULL YEAR SALES AND EARNINGS GUIDANCE

Hormel shares have posted market-beating returns over the last month and YTD, telling us that buyers have remained in control.

Hormel Foods Q3 Preview: Can Shares Stay Hot?

Archer-Daniels-Midland Company

Caterpillar

Chubb

General Dynamics

New Linde PLC

McDonald's

Realty Income Corp

The "Mad Money" host said the companies' quarterly payouts offer protection against Federal Reserve-related market declines.

Jim Cramer says these are his 10 favorite 'dividend aristocrats' to own through year-end

Company shares its food journey progress as a leading corporate citizen  AUSTIN, Minn. , Aug. 30, 2022 /PRNewswire/ -- Hormel Foods Corporation (NYSE: HRL), a Fortune 500 global branded food company, today announced the launch of its 16th annual Global Impact Report.

Hormel Foods Launches its 16th Annual Global Impact Report

Hormel Foods' (HRL) third-quarter fiscal 2022 performance will likely reflect gains from strength in the retail business. Also, improving foodservice division bodes well.

Hormel Foods (HRL) Q3 Earnings Coming Up: Things to Consider

Hormel (HRL) has an impressive earnings surprise history and currently possesses the right combination of the two key ingredients for a likely beat in its next quarterly report.

Why Hormel (HRL) Could Beat Earnings Estimates Again

Broadcom

CrowdStrike

Catalent

HEICO

Hewlett Packard

MongoDB

Veeva Systems

Earnings per share (EPS) growth of S&P 500 companies so far this week has remained almost unchanged from last week and is at the lowest level since the fourth quarter of 2020.

These Are The 10 Biggest Companies Releasing Earnings Next Week

Hormel (HRL) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

Hormel Foods (HRL) Earnings Expected to Grow: What to Know Ahead of Next Week's Release

Hormel Foods' (HRL) new and more consumer-focused operating model includes the Retail, Foodservice and International segments and is likely to be effective from Oct 31, 2022.

Hormel Foods (HRL) New Operating Model Is Likely to Fuel Growth

Company transitioning to three operating segments to drive sustainable growth AUSTIN, Minn. , Aug. 9, 2022 /PRNewswire/ -- Hormel Foods Corporation (NYSE: HRL), a Fortune 500 global branded food company, today announced a new strategic operating model, aligning its businesses to be more agile, consumer and customer focused, and market driven.

Hormel Foods Announces New Strategic Operating Model

AUSTIN, Minn. , Aug. 8, 2022 /PRNewswire/ -- Hormel Foods Corporation (NYSE: HRL) invites you to participate in a webcast and conference call with Jim Snee, chairman of the board, president and chief executive officer, and Jacinth Smiley, executive vice president and chief financial officer, to discuss the company's third quarter financial results.

Hormel Foods Corporation to Report Third Quarter Earnings and Participate in the 2022 Barclays Global Consumer Staples Conference

Hormel Foods has proven to be a safe haven for investors during times of low consumer confidence in the past 20 years. Although macroeconomic headwinds, including elevated commodity prices, may hurt HRL's business as well, we believe the firm is well-positioned to outperform the broader market.

Hormel Could Be A Safe Haven In Turbulent Markets

Hormel Foods stock has clobbered the broader market so far this year.

Is Now the Time to Buy This Dividend King?

Unilever

I'm buying more of these stocks as the market goes down, which is exactly why I love reinvesting my dividends.

Stock Market Plunge: Why I'm Loading Up on These 3 Stocks

PepsiCo

If you are looking for reliable passive income, don't dig too deeply -- just look at the things you buy all the time.

The Best Dividend Stocks to Buy Right Now Could Be Hiding In Plain Sight

Hormel Foods is a Dividend King with 56 consecutive years of dividend growth. Shares currently yield 2.20%. Hormel Foods has spent much of the last decade transitioning their business to provide healthier options for consumers.

Hormel Foods: A Consistent Performer That Rewards Its Shareholders

Hormel Foods (HRL) is boosting business through capacity expansion and strategic acquisitions. Additionally, higher pricing has been aiding amid elevated costs.

News for Hormel Foods Stock (HRL)