Hormel Foods (HRL)

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See all Bulls Reasons Bulls: Reasons To Buy dividends 100% agree dividends Hormel gives them out like candy at Halloween, every quarter for 30 years, I am guessing, not positive, encourage your friends to try the new products, Spam lite, Dinty Moore Country beef stew, and for the wealthy, the gourmet line of minimal processed deli meats. This is a rock solid company, good buy at these prices IMHO View or Edit Reason 1 votes 100% agree Penalized by problems with its peers 0% agree Penalized by problems with its peers HRL has been whacked due to overall margin pressure but particularly within its poultry business, where competitor Pilgrim's Pride faces likely bankruptcy and Tyson is suffering. HRL offers a far superior balance sheet as well as a better mix of business (other types of... read more View or Edit Reason 0 votes 0% agree Bears: Reasons To Sell Feeling Bearish? Be the first to explain why this would make a poor investment Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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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.

[edit] 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.

^[2]

[edit] 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.

[edit] 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:

 Hormel Foods

	Select All  |  Select None Metrics Revenue by Geography - International Revenue by Geography - Europe Revenue by Geography - Asia Revenue by Geography - Africa Revenue by Geography - South America Gross Profit Net Income Operating Income Inventories Inventories - Meat Inventories - Work in process Inventories - Finished Goods Production - Chicken Average Capacity Utilization - Chicken Average Capacity Utilization - Pork Average Capacity Utilization - Beef Processing Plants Owned Revenue Revenue by Geography - United States Average Price per Pound - Chicken Average Price per Pound - Pork Average Price per Pound - Beef Capacity per Week - Chicken Capacity per Week - Pork Capacity per Week - Beef Production - Pork Production - Beef Cancel

	Select All  |  Select None Companies Balchem (BCPC) Bridgford Foods (BRID) Hormel Foods (HRL) Industrias Bachoco, S.A. de C.V. (IBA) Perdigao S.A. (PDA) Sadia S.A. (SDA) Smithfield Foods (SFD) Tyson Foods (TSN) Pilgrim's Pride (PPC) Seaboard Corporation (SEB) Sanderson Farms (SAFM) Zhongpin Inc. (HOGS) Cancel

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Company	Data From	Revenue	Revenue by Geography - United States	Average Price per Pound - Chicken	Average Price per Pound - Pork	Average Price per Pound - Beef	Capacity per Week - Chicken	Capacity per Week - Pork	Capacity per Week - Beef	Production - Pork	Production - Beef
Sanderson Farms (SAFM)	2007	$1.47B[6]	$1.31B[7]	Add	Add	Add	8.13M[8]	Add	Add	Add	Add
Smithfield Foods (SFD)	2008	$11.4B[9]	$10.1B[10]	Add	Add	Add	Add	578K[11]	Add	Add	Add
Tyson Foods (TSN)	2007	$26.9B[12]	$26.9B[12]	Add	Add	Add	46M[13]	444K[13]	222K[13]	Add	Add

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[edit] Footnotes

1. ↑ Hormel 2005 & 2006 Annual Reports, MD&A.
2. ↑ Hormel 2006 Annual Report, 1
3. ↑ USDA, National Agricultural Statistics Service, Agricultural Prices
4. ↑ 2006 Annual Report, "Risk Factors," 34-35.
5. ↑ From Hormel's 2006 Annual Report, pg. 4-7.
6. ↑ 2007 SAFM, 10-k, item 6, Pg 19
7. ↑ 2007 SAFM, 10-k, item 1, Pg 11
8. ↑ 2007 SAFM, 10-k, item 1, Pg 5
9. ↑ 2008 SFD, 10-k, item 6, Pg 32
10. ↑ 2008 SFD, 10-k, item 15, F-39
11. ↑ 2008 SFD, 10-k, item 2, Pg 24
12. ↑ ^{12.0 12.1} 2007 TSN, 10-k, item 6, Pg 19
13. ↑ ^{13.0 13.1 13.2} 2007 TSN, 10-k, item 2, Pg 12