Food Processing Stocks

Hormel Foods Corporation Analysis – September 2015 Update $HRL

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – August 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Hormel Foods Corporation (HRL) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Hormel Foods Corporation is primarily engaged in the production of a variety of meat and food products and the marketing of those products throughout the United States and internationally. The Company markets its products through Hormel Foods International Corporation, a wholly owned subsidiary. The Company operates in five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS), Specialty Foods, and International & Other. The meat products are sold fresh, frozen, cured, smoked, cooked, and canned. Perishable meat includes fresh meats, refrigerated meal solutions, sausages, hams, wieners, and bacon. The Poultry composed primarily of JOTS products. Shelf-stable includes canned luncheon meats, shelf-stable microwaveable meals, stews, chilies, hash, meat spreads, flour and corn tortillas, salsas, tortilla chips, peanut butter, and other items that do not require refrigeration. The Other category primarily consists of nutritional food products and supplements.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of HRL – September 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $16,096,217,580 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.61 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 112.38% Pass
6. Moderate PEmg Ratio PEmg < 20 28.01 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.21 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.61 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.33 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

HRL value Chart September 2015

EPSmg $2.19
MG Growth Estimate 7.87%
MG Value $52.97
Opinion Overvalued
MG Value based on 3% Growth $31.69
MG Value based on 0% Growth $18.58
Market Implied Growth Rate 9.76%
Current Price $61.22
% of Intrinsic Value 115.57%

Hormel Foods Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned by the low current ratio and the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.43 in 2011 to an estimated $2.19 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 9.76% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Hormel Foods Corporation (HRL)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

HRL Charts September 2015

Net Current Asset Value (NCAV) -$0.57
Graham Number $28.99
PEmg 28.01
Current Ratio 1.61
PB Ratio 4.21
Dividend Yield 1.55%
Number of Consecutive Years of Dividend Growth 20

 

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Most Recent Balance Sheet Figures

Total Current Assets $2,003,776,000
Total Current Liabilities $1,245,107,000
Long-Term Debt $250,000,000
Total Assets $6,091,081,000
Intangible Assets $2,527,874,000
Total Liabilities $2,158,295,000
Shares Outstanding (Diluted Average) 270,602,000

Earnings Per Share History

Next Fiscal Year Estimate $2.51
Oct14 $2.23
Oct13 $1.95
Oct12 $1.86
Oct11 $1.74
Oct10 $1.46
Oct09 $1.27
Oct08 $1.04
Oct07 $1.09
Oct06 $1.03
Oct05 $0.91
Oct04 $0.83
Oct03 $0.67
Oct02 $0.68
Oct01 $0.65
Oct00 $0.60
Oct99 $0.56
Oct98 $0.46
Oct97 $0.36
Oct96 $0.26
Oct95 $0.40

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.19
Oct14 $1.96
Oct13 $1.77
Oct12 $1.61
Oct11 $1.43
Oct10 $1.25
Oct09 $1.11
Oct08 $1.02
Oct07 $0.97
Oct06 $0.88
Oct05 $0.79
Oct04 $0.71
Oct03 $0.65
Oct02 $0.62
Oct01 $0.57
Oct00 $0.51
Oct99 $0.44

Recommended Reading:

Other ModernGraham posts about the company

The 10 Best Stocks For Value Investors This Week – 6/20/15
Hormel Foods Corporation Analysis – June 2015 Update $HRL
The Best Companies of the Food Processing Industry – June 2015
18 Companies in the Spotlight This Week – 3/15/15
Hormel Foods Corporation Quarterly Valuation – March 2015 $HRL

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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