Food Processing Stocks

Hormel Foods Corp Valuation – March 2019 #HRL

Company Profile (excerpt from Reuters): Hormel Foods Corporation, incorporated on September 20, 1928, is engaged in the production of a range of meat and food products and the marketing of those products throughout the United States and internationally. The Company is a processor of branded and unbranded food products for retail, foodservice and fresh product customers. The Company operates through four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS) and International & Other. The Company’s Grocery Products segment is engaged in the processing, marketing and sale of shelf-stable food products sold for the retail market and also consist of health and nutrition products, including Muscle Milk protein products. The Grocery Products segment also includes the Company’s MegaMex Foods, LLC (MegaMex) joint venture. The Company’s Refrigerated Foods segment consists of the processing, marketing and sale of branded and unbranded pork, beef, chicken and turkey products for retail, foodservice and fresh product customers. The Company’s JOTS segment consists of the processing, marketing and sale of branded and unbranded turkey products for retail, foodservice and fresh product customers. The Company’s International & Other segment includes Hormel Foods International Corporation (HFIC), which manufactures, markets and sells the Company’s products internationally. The International & Other segment also includes the Company’s international joint ventures.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of HRL – March 2019

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 $23,494,749,686 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.46 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 104.74% Pass
6. Moderate PEmg Ratio PEmg < 20 25.84 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.20 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 1.46 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.38 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

EPSmg $1.70
MG Growth Estimate 8.16%
MG Value $42.10
Opinion Fairly Valued
MG Grade B
MG Value based on 3% Growth $24.60
MG Value based on 0% Growth $14.42
Market Implied Growth Rate 8.67%
Current Price $43.84
% of Intrinsic Value 104.13%

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 is only concerned with the low current ratio. 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 Fairly Valued after growing its EPSmg (normalized earnings) from $1.1 in 2015 to an estimated $1.7 for 2019. This level of demonstrated earnings growth supports the market’s implied estimate of 8.67% 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 within a margin of safety relative to the price.

At the time of valuation, further research into Hormel Foods Corp revealed the company was trading above its Graham Number of $20.32. The company pays a dividend of $0.75 per share, for a yield of 1.7% Its PEmg (price over earnings per share – ModernGraham) was 25.84, which was below the industry average of 26.89, 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 $-0.64.

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) -$0.64
Graham Number $20.32
PEmg 25.84
Current Ratio 1.46
PB Ratio 4.20
Current Dividend $0.75
Dividend Yield 1.71%
Number of Consecutive Years of Dividend Growth 20

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Most Recent Balance Sheet Figures

Balance Sheet Information 1/1/2019
Total Current Assets $2,100,686,000
Total Current Liabilities $1,435,812,000
Long-Term Debt $250,000,000
Total Assets $8,155,398,000
Intangible Assets $3,921,741,000
Total Liabilities $2,449,619,000
Shares Outstanding (Diluted Average) 547,118,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.75
Oct2018 $1.86
Oct2017 $1.57
Oct2016 $1.64
Oct2015 $1.27
Oct2014 $1.12
Oct2013 $0.98
Oct2012 $0.93
Oct2011 $0.87
Oct2010 $0.73
Oct2009 $0.63
Oct2008 $0.52
Oct2007 $0.54
Oct2006 $0.51
Oct2005 $0.46
Oct2004 $0.42
Oct2003 $0.33
Oct2002 $0.34
Oct2001 $0.33
Oct2000 $0.30
Oct1999 $0.28

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.70
Oct2018 $1.61
Oct2017 $1.43
Oct2016 $1.30
Oct2015 $1.10
Oct2014 $0.98
Oct2013 $0.89
Oct2012 $0.81
Oct2011 $0.72
Oct2010 $0.62
Oct2009 $0.56
Oct2008 $0.51
Oct2007 $0.49
Oct2006 $0.44
Oct2005 $0.40
Oct2004 $0.36
Oct2003 $0.32

Recommended Reading:

Other ModernGraham posts about the company

Best Dividend Paying Stocks for Dividend Growth Investors – February 2019
Best Dividend Paying Stocks for Dividend Growth Investors – August 2018
Best Dividend Paying Stocks for Dividend Growth Investors – June 2018
Hormel Foods Corp Valuation – June 2018 $HRL
Best Dividend Paying Stocks for Dividend Growth Investors – August 2017

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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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