Hormel Foods (NYSE:HRL) is a company in transition. It reported a strong second quarter, it just named a new CEO, and its stock still trades near multi-year lows. It’s down 10% over the past year.
What Hormel does
Hormel makes and sells branded meat and food products through grocery stores, restaurants, and international channels.
A new CEO steps in
The company recently named John Ghingo as its next CEO, effective October 26.
Ghingo isn’t an outsider learning the business. As president, he already oversees Retail, Foodservice, and International, plus supply chain, R&D, and corporate strategy. He has 15 years of experience at Mondelez International.
The quarter that got investors’ attention
Hormel reported fiscal second-quarter results on May 28. Net sales grew 2.5% year over year, topping analyst estimates. It was the sixth straight quarter of organic sales growth.
The bottom line is where it got interesting. Adjusted diluted earnings per share jumped 14.3% year over year and beat consensus by a wide margin. Adjusted operating margin expanded to 9.9% from 9.1% a year earlier. That margin gain is the whole point of Hormel’s “Transform and Modernize” initiative, which pushes the company toward higher-margin, value-added products instead of chasing volume at any cost.
The bull case
The turnaround is showing up in the numbers. Six straight quarters of organic growth, expanding margins, and double-digit adjusted EPS growth in Q2. After years of decline, the business looks like it bottomed.
The yield is high and the streak is long. Hormel has raised its dividend for 60 consecutive years, making it a Dividend King. The yield sits near 4.5%, well above where this stock historically traded. A decade ago it yielded under 2%.
The dividend is protected in an unusual way. The Hormel Foundation owns close to half the company and relies on Hormel dividends to fund its operations. That makes a dividend cut extremely unlikely, even with a high payout ratio.
Protein plays well in a GLP-1 world. Weight-loss drugs are cutting demand for empty calories and sugary snacks, but people still eat protein. Hormel’s lineup of turkey, Spam, and lean meats fits that shift better than most legacy food names.
The valuation is depressed. The valuation is depressed. The stock trades near 17 times forward earnings, below its 5-year average of roughly 21.
Photo by AlphaTradeZone
The bear case and risks
The stock has been a long-term loser. Shares are down roughly 50% over the past five years. Adjusted EPS actually declined over the last decade even as revenue grew. Anyone buying is betting the recent turn is real, not a head-fake.
Pricing power is close to its ceiling. Hormel’s ability to pass cost inflation onto shoppers is running out. If prices push consumers to private-label alternatives for good, the volume recovery the turnaround needs falls apart.
Commodity costs are a constant threat. Pork and beef prices swing hard. Management said on the Q2 call that it expects pork costs to stay near prior-year levels rather than provide the relief bulls hoped for. If volatility outruns Hormel’s hedging, margins compress.
The bottom line
Hormel is a quality business that fell out of favor and is clawing back. The turnaround has six quarters of organic growth behind it, margins are expanding, and a permanent CEO is now in place to keep it going. It’s a decent buy for long-term investors who aren’t expecting wild growth but prefer stability and dividends.
While we acknowledge the risk and potential of HRL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than HRL and that has 10,000% upside potential, check out our report about the cheapest AI stock.
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