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 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016. 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 Corp (HRL) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Hormel Foods Corporation is a multinational manufacturer and marketer of food and meat products. The Company operates through five segments: Grocery Products, which consists of the processing, marketing and sale of shelf-stable food products sold in the retail market; Refrigerated Foods, which consists of the processing, marketing and sale of branded and unbranded pork and beef products for retail, foodservice and fresh product customers; Jennie-O Turkey Store, which consists of the processing, marketing and sale of branded and unbranded turkey products for retail, foodservice and fresh product customers; Specialty Foods, which consists of the packaging and sale of private label shelf stable products, nutritional products, sugar and condiments to industrial, retail and foodservice customers, and International & Other, which includes the Hormel Foods International Corporation, which manufactures, markets and sells the Company products internationally.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$20,261,470,094||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.78||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||135.55%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||29.96||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||4.77||Fail|
|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||1.78||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||0.28||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
|MG Growth Estimate||8.98%|
|MG Value based on 3% Growth||$18.71|
|MG Value based on 0% Growth||$10.97|
|Market Implied Growth Rate||10.73%|
|% of Intrinsic Value||113.22%|
Hormel Foods Corp is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.81 in 2012 to an estimated $1.29 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 10.73% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Hormel Foods Corp revealed the company was trading above its Graham Number of $17.33. The company pays a dividend of $0.56 per share, for a yield of 1.4% Its PEmg (price over earnings per share – ModernGraham) was 29.96, which was below the industry average of 30.19, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $0.03.
Hormel Foods Corp performs fairly well in the ModernGraham grading system, scoring a B-.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||$0.03|
|Number of Consecutive Years of Dividend Growth||20|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||7/1/2016|
|Total Current Assets||$2,010,105,000|
|Total Current Liabilities||$1,128,727,000|
|Shares Outstanding (Diluted Average)||542,163,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$1.61|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$1.29|
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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.