Hormel Foods- The Definition Of A Boring Compounder (Analysis)
Hormel Foods (ticker HRL) has an outstanding long-term track record, yet it’s not a widely known company.
What does Hormel do and is it likely to be a good investment in the coming years?
Table of Contents
Hormel’s business:
Hormel is an old company and was founded in 1891. According to the CEO, Hormel is a protein company, and produces meat and food products for retail, wholesalers, and deli, mostly in the US but also internationally (7%). It has four business segments: Refrigerated Foods (55% of revenue), Grocery Products (25% of revenue), Jennie-O Turkey Store (14% of revenue), and International & Other (6% of revenue).
Some of its brands include Hormel, SPAM, Skippy, Jennie-O, Applegate, Justin’s, and Dinty Moore, but also many other smaller brands. The aim is to have brands as either number 1 or 2 in its category, and historically most of the brands ranked lower have been divested. The focus is profitability, not to build empires.
Hormel’s past share performance:
In the long run, the share price correlates with the operational performance. How has Hormel’s share price performed?
Since 1990 the stock price has returned 13% annually with dividend reinvested, substantially better than the S&P 500. This puts Hormel into the elite class of star performers:
Hormel has crushed the market over any longer-term timeframe very consistently. Since 1990 Hormel has managed a positive return in every five-year period:
Over the last five years, Hormel has returned only 5% annually, well below the main indices. This has resulted in the cheapest valuation for Hormel in about a decade (see more below).
Hormel’s operation performance:
The reason for the slow growth in sales is due to the divestment of brands, which has resulted in margin expansion. Hormel has historically returned around 15-20% on the equity (because it has no little debt the return on invested capital is about the same).
Hormel is a Dividend King:
Hormel is one of the few stocks that has risen its dividend over 50 years in a row, 55 years to be precise. The dividend yield is at 2.1%, a level not frequently touched. Over the last decade, the payout ratio has been around 30-50%, rising slightly in the last years. There are no significant buybacks at these levels.
Hormel is a family business:
The company is controlled by the Hormel Foundation, which directly owns about 5% of the company and much more indirectly. Historically, family-owned businesses have outperformed the market:
Hormel’s balance sheet:
As is typical with family businesses, Hormel has always been conservative and carries most of the time a net cash position on the balance sheet, which makes them immune to financial crisis or shocks. With the recent acquisition of Planters from Kraft Heinz, the balance sheet has moderate debt. Hormel has proved to be shrewd acquirers, one reason being it most of the time has available cash.
Hormel is one of the few consumer stocks that have practically zero debt, something that makes both the business and its dividend much safer than comparable stocks. They have ammunition for more acquisitions, or even buybacks if the stock gets cheaper.
Hormel’s valuation:
Hormel always trades at high multiples. The current trailing PE is 25, however, some of the low margin businesses have been sold off and replaced with new ones. Furthermore, some of its products have been in a cyclical slump that is expected to improve in the coming years.
Conclusion:
As long as you don’t overpay for earnings, we believe it’s hard to lose money in a debt-free family-owned company that historically has proven to be both good operators and allocators. Hormel is one of those companies. At an earnings multiple at 25, it’s not “cheap”, but Hormel never is. Margin expansion and better pricing most likely mean a higher EPS in the coming years. Furthermore, you can expect this to be a defensive play if the market goes south, just like what happened in 2008 when the share price dropped much less than the market (and earnings were flat).
If the EPS grows at historical levels, about 8-12%, we can expect the returns over the next decade to be around the same level plus the dividend yield of 2.15: 10-14%.
Disclosure: We are long Hormel. We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.
