Hormel Foods Corporation Quarterly Valuation – March 2015 $HRL

220px-Hormel_logo.svgBenjamin 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 5 Most Undervalued Companies for the Defensive Investor – March 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 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 (HFIC), a wholly owned subsidiary. It 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 (excluding JOTS products). The Poultry category is composed primarily of JOTS products. On January 31, 2013, the Company acquired the United States based SKIPPY peanut butter business from Conopco, Inc. In August 2014, Hormel Foods Corporation acquired CytoSport Holdings, Inc.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $55.25
MG Value $53.81
MG Opinion Fairly Valued
Value Based on 3% Growth $31.88
Value Based on 0% Growth $18.69
Market Implied Growth Rate 8.31%
Net Current Asset Value (NCAV) $1.53
PEmg 25.13
Current Ratio 2.40
PB Ratio 4.00

Balance Sheet - January 2015

Current Assets $2,246,000,000
Current Liabilities $937,000,000
Total Debt $250,000,000
Total Assets $5,560,000,000
Intangible Assets $1,778,000,000
Total Liabilities $1,833,000,000
Outstanding Shares 270,100,000

Earnings Per Share

2015 (estimate) $2.55
2014 $2.23
2013 $1.95
2012 $1.86
2011 $1.74
2010 $1.46
2009 $1.27
2008 $1.04
2007 $1.09
2006 $1.03
2005 $0.91

Earnings Per Share – ModernGraham

2015 (estimate) $2.20
2014 $1.96
2013 $1.77
2012 $1.61
2011 $1.43
2010 $1.25

Dividend History


Hormel Foods Corporation is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the high PEmg and PB ratios while the Enterprising Investor has no initial concerns.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.43 in 2011 to an estimated $2.20 for 2015.  This level of demonstrated growth supports the market’s implied estimate of 8.31% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

Be sure to check out previous ModernGraham valuations of Hormel Foods Corporation (HRL) for greater perspective!

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.

Disclaimer:  The author did not hold a position in Hormel Foods Corporation (HRL) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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