Hormel Foods Corporation (NYSE:HRL) is one of the largest producers of meat and food products, and caught my eye when looking for investment candidates in the food industry. While the stock may look expensive upon a first glance, trading for over 22 times TTM earnings, a more in-depth look reveals that this may not be the case at all.
Hormel Foods Corporation (NYSE:HRL)’s business is doing great, as you can see by its recent revenue history below, but after the 35% gain in share price over the past six months or so, should shareholders hold on for more, or get out and take their profits now?
About Hormel Foods
Hormel Foods Corporation (NYSE:HRL) operates its business in five segments: grocery products, refrigerated foods, Jennie-O, specialty foods, and “other.” Grocery products account for 14% of Hormel’s sales and include the company’s shelf-stable food products. Refrigerated foods account for the majority (51%) of the company’s sales and consist of pork and beef products. Jennie-O Turkey Store (19% of sales) consists of the processing and marketing of turkey products to retail and foodservice customers. Specialty foods (11% of sales) include sugar, salt, and pepper products, and the “other” segment (4%) includes Hormel Foods Corporation (NYSE:HRL)’s international sales and marketing efforts.
The company has grown in recent years as a result of strategic acquisitions. To name a few, Hormel acquired Country Crock in 2012 and its line of chilled side dishes in order to complement its own entrée products. Also, Hormel recently acquired the Skippy peanut butter brand, which should help the company’s earnings as the Skippy brand operates at a higher margin than the rest of Hormel’s business.
While we have established that Hormel Foods Corporation (NYSE:HRL)’s sales numbers look very strong, I’m concerned with the rapid rise in the share price lately, which has drastically outpaced the annual revenue growth of around 7%.
At the current share price, Hormel trades at around 22 times TTM earnings and yields 1.64% annually. The company is projected to earn $2.00 per share for 2013, rising to $2.27 and $2.53 in 2014 and 2015, respectively. This translates to an annual forward earnings growth rate of 10.8% annually, which is a little low for such a high valuation. Hormel does have an excellent balance sheet and over $500 billion in net cash (cash minus debt), which is worthy of some consideration, as is the fact that the company has raised its dividend every single year. Still, Hormel seems a bit pricey, so let’s see what else our investment dollar could buy.
Alternatives to Hormel Foods Corporation (NYSE:HRL) include meat and food manufacturers of similar size, such as Tyson Foods, Inc. (NYSE:TSN), or larger, more diverse operations like General Mills, Inc. (NYSE:GIS), which provide more stability at the expense of lowered growth potential.
Tyson Foods, Inc. (NYSE:TSN) is a bit smaller than Hormel Foods Corporation (NYSE:HRL) by market cap, and is perhaps best-known for its chicken products, although it supplies a variety of beef and pork products as well. Tyson Foods, Inc. (NYSE:TSN) appears much cheaper at 13 times last year’s earnings, however a lower 8% forward growth rate is forecast for the company. Additionally, their balance sheet is not quite as impressive, with about $900 million more debt than cash. Another downside to Tyson is the lower dividend yield of just 0.8%, which is sure to dissuade some income-seeking investors.
General Mills, Inc. (NYSE:GIS), as mentioned, is a much larger company, with a market cap about triple that of Hormel. Shares of General Mills, Inc. (NYSE:GIS) trade for about 18.6 times TTM earnings, with a steady 7% growth rate projected, making shares seem a bit high. The company’s size and stability do warrant somewhat of a premium, and the 3.1% dividend yield is the highest of the three companies mentioned here. But for almost 20 times earnings, I’d invest in something with a little more growth potential.
Buy, Sell, or Hold?
For those who hold shares of Hormel Foods Corporation (NYSE:HRL), I would say that now might be a good time to take at least a little bit of your profits off of the table. While I think Hormel has a bright future, such a tremendous spike in the share price is hard to ignore (and hard to sustain), and there is nothing wrong with a gain of over 30% in the first five months of the year. This entire sector seems to be getting a bit overvalued and I would wait for a significant pullback before considering any new investment in these companies.
The article This Food Company Seems Expensive, As Do the Rest! originally appeared on Fool.com and is written by Matthew Frankel.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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