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Why Is Hormel (HRL) Up 1% Since Last Earnings Report?

It has been about a month since the last earnings report for Hormel Foods (HRL). Shares have added about 1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Hormel due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Hormel Foods Q1 Earnings Beat Estimates, Sales up Y/Y

Hormel Foods posted first-quarter fiscal 2021 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Also, sales increased year over year on the back of growth across all segments. However, earnings declined year over year.

Quarter in Detail

Quarterly earnings of 41 cents per share surpassed the Zacks Consensus Estimate of 40 cents. However, the bottom line declined 9% year over year.

Net sales in the first quarter were $2,461.1 million, which surpassed the Zacks Consensus Estimate of $2,384.5 million. Moreover, the top line increased 3% year over year. Sales growth across all the segments drove the top line. However, volumes were 1.2 billion lbs, down 1% year on year. Channel-wise, net sales across U.S. retail, U.S. deli and International climbed up 13%, 7%, and 9%, respectively. However, net sales in U.S. foodservice channel declined 17%.

Selling, general and administrative expenses were flat at $196.4 million. Operating margin in the first quarter stood at 10.9%, down from 11.8% reported in the year-ago quarter, thanks to reduced sales and profitability in the foodservice business.

Segment Details

Net sales in the Grocery Products unit increased 7% to $577.6 million. Volumes were also up 4%. The upside can be attributed to strength in various center store products like the SPAM family of products, SKIPPY spreads and Hormel Compleats meals among others. Profits in the unit surged 35% driven by increased sales, favorable mix and greater earnings from the MegaMex business.

Net sales in the Jennie-O Turkey Store segment inched up 1% to $333.3 million, while volumes declined 2%. Upside in sales was backed by growth in the complete retail portfolio, led by double-digit growth of Jennie-O lean ground and Jennie-O Oven Ready items. Also, solid holiday sales of whole birds were a reason. However, significantly reduced foodservice sales were a drag. Segment profit tanked 30% due to contraction in foodservice sales. Also, high supply chain costs associated with the pandemic and increased freight expenses dented profits.

The company’s Refrigerated Foods generated sales of $1,367.1 million, up 1% year over year. However, volumes declined 2%. Gains from sales growth in retail and deli were countered by significant decline in foodservice business. Segment profit fell 16% due to sluggish foodservice sales, high supply chain costs related to pandemic and lower commodity profits.

International & Other sales increased 13% to $183.2 million, while volumes fell 5%. Notably, the company saw broad-based strength across branded businesses that included continued growth in China and robust sales of SPAM luncheon meat as well as SKIPPY peanut butter. Segment profit surged 61% on improved results for branded exports, acceleration of recovery in China. Also, increased income from partners in the Philippines, South Korea and Europe was a reason.

Balance Sheet & Cash Flow

The company ended the quarter with cash and cash equivalents of $1,751.5 million and long-term debt of $1,043.1 million (excluding current maturities). For 13-weeks ended Jan 24, 2021, Hormel Foods generated cash of $206 million from operating activities. Operating free cash flow amounted to $165 million. Management expects capital expenditures of $260 million for fiscal 2021.

We note that on Feb16, the company paid out its 370th straight quarterly dividend of 98 cents.

Other Details

During the quarter, the company absorbed nearly $15 million in direct incremental supply chain costs mainly induced by reduced production volumes and better safety measures in its manufacturing facilities amid the pandemic. Management expects these temporary costs to minimize after COVID-19 subsides.

On Feb 11, 2021 the company announced the acquisition of Planters snack nuts business for an effective purchase price of $2.79 billion. The deal which includes Planters, NUT-rition, Planters Cheez Balls and Corn Nuts brands is expected to close in calendar second quarter of 2021.

Outlook

Management projects net sales in the range of $9.70-$10.30 billion and earnings per share in the band of $1.70-$1.82 in fiscal 2021. The guidance does not take into account the impact of recent acquisition of Planters snack nuts business.

The company is impressed with momentum in its retail and deli teams going into the second quarter. Management believes that the International segment is well positioned to grow during the year driven by continued strength in its China business, branded exports and global partnerships. Hormel Foods also expects to see recovery in its foodservice business.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

Currently, Hormel has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Hormel has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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