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

General Mills

Hershey

Kroger

As difficult as the first half of 2022 has been for most businesses, there are a few that have managed to deliver positive returns to their shareholders. Here we highlight four companies that tend to benefit from recessions and that have delivered positive returns to shareholders in the first half of the year.

Rising Recession Risk: These Companies Could Actually Benefit

Walgreens

Growth stocks might not look attractive now but could offer everlasting returns when the market shifts.

Smart Investors Are Buying and Holding These 3 Supercharged Stocks

AUSTIN, Minn. , July 13, 2022 /PRNewswire/ -- Hormel Foods Corporation (NYSE: HRL), a Fortune 500 global branded food company, is pleased to announce that it has ranked No.

Hormel Foods Named to Selling Power's 50 Best Companies to Sell For List in 2022

Hormel Foods (HRL) benefits from brand strength, improved foodservice business and higher pricing. However, input cost inflation is a concern.

Hormel Foods (HRL) Benefits From Brand Strength, Hurt by Costs

Experts weigh in on how edible experiences, viral food and mission-based products are having big culinary moments right now and show no signs of slowing down AUSTIN, Minn. , June 30, 2022 /PRNewswire/ -- It's no surprise that consumer preferences about food shifted widely during the past two years as people reprioritized what mattered most to them.

Hormel Foods Details Changing Culinary Landscape in America

Hormel Foods continues ESG investment in practices to enhance soil health, water and air quality, and sequester greenhouse gases AUSTIN, Minn. , June 28, 2022 /PRNewswire/ -- Hormel Foods Corporation (NYSE: HRL), a Fortune 500 global branded food company, along with its subsidiary Applegate Farms LLC, is leading the way in supporting farmers who employ regenerative agriculture practices, a holistic system of farming that encourages continuous innovation and soil improvement using techniques such as minimal or no soil tillage, regular crop rotation and cover cropping.

Hormel Foods Announces New Regenerative Agriculture Initiatives

The strength of company's brands, foodservice recovery and international business among focus areas AUSTIN, Minn. , June 24, 2022 /PRNewswire/ -- Fortune 500 global branded food company Hormel Foods (NYSE: HRL) recently presented at the 2022 Deutsche Bank dbAccess Global Consumer Conference held in Paris from June 14-16.

Hormel Foods Global Brands and Business Strategy on Stage at dbAccess Global Consumer Conference

The consumer staple sector is often full of names with long track records of dividend growth as companies in the space sell products that customers need regardless of the state of the economy. It's one reason why nearly a quarter of both the Dividend Aristocrats, those S&P 500 names with at least 25 consecutive years of dividend growth, and the Dividend Kings, those names with at least five decades of dividend growth, are in the consumer staples industry.

Hormel: A Steady Dividend Stock for Uncertain Times

Florence Makope Joins Hormel Foods as New Vice President and Treasurer AUSTIN, Minn. , June 21, 2022 /PRNewswire/ -- Hormel Foods Corporation (NYSE: HRL), a Fortune 500 global branded food company, today announced that Gary Jamison, vice president and treasurer, will be retiring after a 34-year career with the company.

Hormel Foods Announces Retirement of Gary Jamison, Vice President and Treasurer, After 34 Years with the Company

Colgate-Palmolive

Procter & Gamble

Recession or not, Dividend Kings have a proven track record of success that includes over 50 years of consecutive distribution increases. This tells us management has the foresight to run their companies profitably in both good times and bad.

Ride Out The Recession With These Dividend Kings

Pilgrim's Pride

PPC vs. HRL: Which Stock Is the Better Value Option?

PPC or HRL: Which Is the Better Value Stock Right Now?

After making new all-time highs earlier this year, Hormel Foods stock has now dropped into the red on a year-to-date basis. The sell-off continued following the company's Q2 earnings results, even as the company beat earnings estimates.

Is Hormel Foods Stock Undervalued? Yes, Shares Are Back In The Buy Zone

AUSTIN, Minn. , June 16, 2022 /PRNewswire/ -- The PLANTERS® brand traveling NUTMOBILE™ vehicle hit the road this week with a new class of Peanutters.

Hormel Foods Sending its First Class of Planters® Peanutters to the Streets of America!

Hormel faces a number of long-term headwinds. However, the company is evolving to meet those trends.

Is Hormel Stock A Buy After Earnings?

Coca-Cola

Mondelez

J. M. Smucker

Here are four food stocks to add to your watchlist right now.

Top Food Stocks To Buy Right Now? 4 To Know

AUSTIN, Minn. , June 8, 2022 /PRNewswire/ -- Hormel Foods Corporation (NYSE: HRL), a global branded food company, will be participating at the 2022 Deutsche Bank dbAccess Global Consumer Conference in Paris, France.

Updated Time: Hormel Foods Corporation to Participate in the Deutsche Bank dbAccess Global Consumer Conference

AUSTIN, Minn. , June 8, 2022 /PRNewswire/ -- The makers of HORMEL® NATURAL CHOICE® products, a lunchtime favorite and tasty solution for any mealtime, announced its newest product, HORMEL® NATURAL CHOICE® Sandwich Pepperoni.

The Makers of the HORMEL® NATURAL CHOICE® Brand Launch New Product to Spice up Sandwiches and Charcuterie Boards

BJ`s Wholesale Club Holdings Inc

Dollar General

Dollar Tree

Could these consumer staples stocks offer investors a safe haven amid market turbulence?

5 Consumer Staples Stocks To Watch In June 2022

Some of the drop in organic volumes was due to the pandemic, but a sizable portion was part of the long-term plan.

Here's Why Hormel's Weak U.S. Volumes Are a Good Thing

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.

Hormel Foods Sends A Message To The Market

Hormel Foods' (HRL) second-quarter fiscal 2022 results reflect higher earnings and sales, backed by strength across brands and solid pricing.

Hormel Foods (HRL) Q2 Earnings Top Estimates on Solid Pricing

Hormel Foods Corporation (NYSE:HRL ) Q2 2022 Earnings Conference Call June 2, 2022 8:00 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 Jack Hardin - Stephens Inc. Antonio Hernández - Barclays Ken Zaslow - BMO Capital Markets Michael Lavery - Piper Sandler Bryan Spillane - Bank of America Thomas Palmer - JPMorgan Eric Larson - Seaport Research Partners Robert Moskow - Credit Suisse Arthur Almeida - Goldman Sachs Carson Barnes - Consumer Edge Research Rebecca Scheuneman - Morningstar Operator Good morning, and welcome to the Hormel Foods Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode.

Hormel Foods Corporation (HRL) CEO Jim Snee on Q2 2022 Results - Earnings Call Transcript

Hormel (HRL) delivered earnings and revenue surprises of 4.35% and 2.23%, respectively, for the quarter ended April 2022. Do the numbers hold clues to what lies ahead for the stock?

Hormel Foods (HRL) Surpasses Q2 Earnings and Revenue Estimates

Hormel Foods Corp. HRL, -0.80% , parent of brands inluding Planters, Skippy, Spam, Applgegate and Jennie-O, posted better-than-expected earnings for its fiscal second quarter on Thursday and backed sales guidance for the full year. The company posted net income of $261.6 million, or 48 cents a share, for the quarter to May 1, up from $227.9 million, or 42 cents a share, in the year-earlier period.

Hormel tops earnings estimates for its second quarter and backs full-year sales guidance

The company reaffirms its full-year sales expectations and narrows its earnings guidance range AUSTIN, Minn. , June 2, 2022 /PRNewswire/ -- Hormel Foods Corporation (NYSE: HRL), a leading global branded food company, today reported results for the second quarter of fiscal 2022.

News for Hormel Foods Stock (HRL)