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WIKI ANALYSIS
Hormel Foods, Inc. sells a wide variety of convenient, packaged meat foods, including those of the Hormel Chili, SPAM, Oven Ready, Jennie-O, Lloyd’s Barbeque, and Valley Fresh brands in over 40 countries. The company operates in five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Food, and Other. Hormel purports that 34 of its brands enjoy the number one or two market share position. In addition, 80% of Hormel's sales come from branded products rather than meat processing, affording it a margin cushion when input prices rise (also see Private Label Trends).
The company's financial results and margins are tied closely to the cost and supply of pork, poultry, and feedstuff commodities prices like grain, which are the principal costs in raising livestock; corn prices in particular have risen in 2007 as ethanol producers have increased demand for the grain. The company generally enters into long-term hedging arrangements with suppliers, but major fluctuations in price or supply disruptions can adversely impact results. In the longer term, consumption in increasingly wealthy countries such as China may be particularly attractive to Hormel given its strong portfolio of branded meat products.
Business Financials
Based on segment sales data below, grocery products, including the well-known SPAM and Valley Fresh brands, are the highest margin business, and while these account for only 15% of sales, 28% of operating profit is attributable to this category, indicating the brands' strength.
Key Trends, Risks and Forces
- Supply and price of inputs (live pork and poultry). [3] Hormel is heavily dependent upon favorable pricing and availability of live hogs and poultry in making its foods, as well as the commodity inputs that are required to feed the animals (Grains Prices, corn, etc). Major increases in price or major shocks to or shifts in supply could increase costs and deteriorate margins. Corn prices in particular have risen sharply in 2007 as ethanol producers increased their demand for input commodity, thus driving up prices for food manufacturers (rising oil prices, in turn, increased ethanol demand). Hormel believes its long-term hedging contracts to “lock in” current prices, as well as its ability to partially pass on costs to consumers through price increases, are sufficient to mitigate risk. However, the “spot” hog market (i.e. buying hogs without a long-term contract) is steadily on the decline, and it is possible that underutilized slaughterhouses lead to increases in Hormel’s raw materials. Also, grain prices have been rising and can be volatile, further increasing the volatility and potential contraction of margins.[4]
- Ability to brand and market value-added meat products. About 80% of packaged meat products are branded, as the companies that sell them attempt to differentiate their product and leverage pricing power by staying "top of mind" in the grocery store (also see Private Label Trends). Hormel's brands are vitally important to the company's margins and ability to sell larger volumes than its undifferentiated competitors. The quality of the company's products and strength of the Hormel name vis-a-vis similarly successful meat brands (e.g., Tyson Foods (TSN)) is a key determinant of success going further. Furthermore, the ability of Hormel to develop the same brand strength in increasingly wealthy international markets like China, will be crucial in determining success going forward.
- Growth abroad. While the company's domestic market (U.S.) are fairly mature, other markets, including China, represent attractive prospects for more organic growth. The company particularly notes that its Chinese operations have been reporting strong top and bottom line growth, and management recognizes China as a key area for Hormel's growth.[5] As China becomes more economically mature and consumers begin to value Hormel’s brands, the company can benefit from strong growth in this rapidly expanding market and is pursuing initiatives to grow its business there.
- Disease outbreaks. The company is subject to the possibility of animal disease outbreaks that might threaten sales, hamper margins, or lead to reputational damage if humans were ever to become infected. Furthermore, government intervention or restrictions following an outbreak could lead to adverse results.
Competition
Hormel competes largely with similarly positioned large providers of packaged meat products that one might typically find on any grocery store shelf. These include Tyson Foods, Smithfield Foods, Pilgrim’s Pride, and Sanderson Farms. Below are some relevant operating metrics:
| Company | Revenue 2006 ($M) | Operating Income 2006 ($M) | Revenue 2005 ($M) | Operating Income 2005 ($M) | Operating Margin 5-year Average (%) | Global Presence (# Countries Exported to) | International Sales as % of Revenue 2006 (%) |
| Hormel Foods (HRL) | 5,700 | 451 | 5,400 | 426 | 7.84% | 40+ | <4% |
| Tyson Foods (TSN) | 25,600 | (-77) | 26,000 | 745 | 2.63% | 80+ | 8.2% |
| Smithfield Foods (SFD) | 11,400 | 279 | 11,200 | 454 | 2.47% | 36+ | 6 - 9% |
| Pilgrim's Pride (PPC) | 5,200 | 3 | 5,700 | 436 | 3.72% | 2 | 8.3% |
| Sanderson Farms (SAFM) | 1,048 | (-27) | 1,053 | 113 | 7.84% | 10+ | 6.6% |
Footnotes
- ↑ Hormel 2005 & 2006 Annual Reports, MD&A.
- ↑ Hormel 2006 Annual Report, 1
- ↑ USDA, National Agricultural Statistics Service, Agricultural Prices
- ↑ 2006 Annual Report, "Risk Factors," 34-35.
- ↑ From Hormel's 2006 Annual Report, pg. 4-7.
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