Investing in meat and packaged foods can be profitable

High global inflation is wreaking havoc on consumer purchasing power.

Certainly, companies are passing on the full impact of supply chain problems to the end consumer.

Not to mention the effect of rising energy, fuel and other commodity prices.

In this respect, companies in the consumer staples sector can represent an important hedge for investors.

Those in the meat and packaged food industry certainly have a great advantage, as we cannot stop feeding ourselves.

They are companies that have a certain level of assured demand regardless of circumstances.

The S&P 500 includes the 12 most important companies in this industry operating in the USA.

Read on and you will learn about one of the companies with the best prospects at the moment.

It can be a hedge against high inflation that won’t let up and portends faster and sharper interest rate hikes by the Fed.

Hormel Foods: Investing in meats and packaged foods

Hormel Foods is a food company focused on protein products.

It holds the number one market position in non-perishable meat, non-perishable convenience foods, pepperoni, natural/organic cold cuts and guacamole, and the number two position in turkey, bacon, refrigerated prepared foods and peanut butter.

The vast majority of its revenues are generated in the US.:

• 64% in retail.
• 28% in foodservice.
• 8 % overseas.

By 2021 its revenues by product type were distributed as follows:

• 23% were in non-perishable foods.
• 18% to poultry (branded and commodity).
• 55 % to other perishable foods.
• 3% other, mainly nutritional products.

The company is located in Austin, Minnesota (USA) and has 20,000 employees.

Its current market capitalization is $29.2 billion and it is considered a defensive, slow-growth, dividend-paying stock.

Why invest in a “slow growth” company?

Well, because the overall picture for the U.S. economy is very high risk.

Because there are so many potentially negative factors that can combine to produce a recession, investors adjust their portfolios and move funds into sectors that can withstand a market downturn.

The meat and packaged foods sector would be one of them…

Hormel Foods shares remain bullish

Let’s take a look at the monthly Japanese candlestick chart with exponential moving average (EMA-90) and MACD indicator for the share of HRL listed on the NYSE:

The slope of the 90-period EMA confirms a primary uptrend that has been in place for several years.

“Neither the stock market correction in 2018 nor the COVID-19 pandemic in 2020 could reverse the bullish behavior of Hormel Foods shares”

Neither the stock market correction in 2018 nor the COVID-19 pandemic in 2020 could reverse that bullish behavior.

However, a significant loss of momentum was observed in September 2021 which reversed in December 2021 with the price breaking an important resistance level around $45.72.

By the end of April 2022, the price is at $53.59 and the MACD indicator is in positive territory above the middle line of the histogram.

This implies a certain level of technical strength of the price at this very moment.

At the beginning of March 2022 Morningstar put HRL’s fair value at $37.00 and suggested investors to stay on the sidelines as the price was already reflecting the company’s good performance.

Therefore, the current price level is likely to be relatively high. However, any correction close to support around $45.72 would be more reasonable to consider entering.

It all depends on the time horizon of each investor, as it is clear that inflationary pressures are going to remain in the short term, so the stock could even advance further before correcting, if at all.

Advantages and disadvantages of investing in Hormel Foods stock

Below we review some metrics and ratios of Hormel Foods to evaluate its fundamentals:

Fluctuating revenue but on an upward trajectory

HRL’s total revenue reached $3,044.4 million for the quarter ended January 2022, for a decline of 11.9%.

However, the previous 2 quarters revenues were on an upward trajectory with growth of 20.6% and 9.9%.

“If the company is able to keep pace in the next 3 quarters it could surpass the annual barrier of 12 billion in 2022.”

In fact, between 2020 and 2021 total annual revenue went from $9.608 billion to $11.386 billion, for a growth of $1.778 billion (+18.5%).

After a challenging 2019, the company has managed to exceed analysts’ revenue estimates in 8 of the last 9 quarters.

If the company is able to keep pace in the next 3 quarters it could surpass the annual barrier of 12 billion in 2022.

On the other hand, net income reached $239.6 million for a decrease of 15.0%.

Its revenue generation reflects a certain irregular character, so the result of the next quarter to be reported on May 26th should be closely watched.

As companies pass on cost increases to the final price of their products, consumers are forced to allocate an increasing fraction of their income to basic expenses such as food and heating.

However, demand for HRL’s products would be expected to continue, so it could still withstand price increases without being affected.

Of course, there is a limit to this as prices continue to rise much higher.

Strong but somewhat leveraged balance sheet

HRL’s total assets reached $12,827.0 million as of January 2022,

reflecting growth of $2,443.2 million (+24.7%) as of July 2021.

Its financing structure is distributed in 44.6% in liabilities and 55.4% in capital.

Liabilities and capital totaled US$5,726.4 and US$7,100.6 million.

Long-term debt increased from July 2021 and currently represents 46.6% with respect to capital.

We consider this to be a relatively manageable value, although the prospect of rising interest rates could put future pressures on its cash flow.

The question is whether the company will be able to translate the investments made into higher revenues, better margins and higher profitability.

Ratios and metrics need to improve further

Let’s now look at some ratios and metrics of interest to better profile HRL:

Somewhat high valuation

Hormel Foods’ P/E ratio currently stands at 31.68 versus 28.18 for the industry.

This being the case, the company is slightly overvalued (+12.4%), although it is not too large a difference.

This makes many investors think that its current price level is somewhat high, so some recommend not to enter at this time and wait for a corrective level.

However, if we think with a longer time horizon, what it comes down to is finding companies that can withstand the onslaught of the rising interest rate cycle in the US.

“A company like Hormel Foods whose valuation is not too high could still represent a buying opportunity to protect our investment portfolio.”

If those companies are undervalued and have good fundamentals so much the better.

But, a company like Hormel Foods whose valuation is not too high either, could still represent an opportunity to protect our investment portfolio.

Let’s not forget that if a business is undervalued, it is for a reason. Moreover, not all companies with that condition have managed to change their fundamentals to reverse that trend.

Gross margin must improve

HRL’s gross margin is 16.85% versus an industry average of 27.62%.

Although below average, the company has the tools to grow and does not have an exorbitant level of debt.

Very attractive net margin

The net margin is 7.74% versus -63.84% for the industry. This is one of the company’s main strengths at the moment and implies significant operating skills.

Let us remember that this type of industry is not characterized by high margins.

Furthermore, if we look at HRL’s lower-than-average gross margin, it must be said that the company managed to be more efficient in managing its resources than many of its competitors.

ROE somewhat low

Return on shareholders’ equity (ROE) is 13.57% versus 18.90%, so this is an area for improvement as the company is able to grow and generate greater surpluses.

High ROA

Return on assets (ROA) is 8.13% versus 6.08% for the industry. This is another element in favor that reflects the aforementioned skills.

Very low earnings per share

In terms of average five-year earnings per share growth, the company shows a pyrrhic 0.23% versus 10.52% for the industry.

This is a very low metric that needs to improve a lot in order to maintain the current valuation, or even a much higher one.

Reasonable sales growth

The average five-year sales growth reaches 3.64% versus 4.26% for the industry.

Although slightly below, it is a value that is in line with the industry average, although it could improve.

Good liquidity position

The current ratio is 2.19 versus 1.43 for the industry. This is a strength that reflects a good liquidity position to meet short-term obligations.

Dividends double the industry

The annual dividend growth rate is 9.72% versus 4.03% for the industry.

In this metric, Hormel Foods is twice the average and maintains a strength to be taken into account.

Reasonable payout ratio

HRL’s payout ratio is 43.82% versus 69.79% for the industry.

Although below average, it is a reasonable value that can be improved considering the size of the company.

is investing in meat and packaged foods worth it?

Hormel Foods has lights and shadows, but after reviewing the 12 companies in the sector that are part of the S&P 500, we can tell you that it is one of the most promising.

If you want to review other companies of interest, we will mention Tyson Foods Inc (TSN) and ConAgra Foods IncCAG), which also have a lot of potential and are undervalued relative to the industry.

The others tend to have very high indebtedness and do not have good earnings trajectories.

As you rightly say Ian Bezek, in a note published for InvestorPlace on April 11:

“Short sellers clearly thought that the inflationary cycle was going to sink Hormel.

Instead, the company has been able to raise food prices with little or no reaction from consumers, leading to record profits.

That being the case, Hormel has gone from 52-week lows to 52-week highs, as shares are up 25% over the past six months.

As consumer demand for fresh, natural foods continues to grow, such as naturally raised meats, organic nuts and nut butters, and freshly made guacamole, Hormel should continue to post further earnings growth and surprise the stock haters once again.”

Don’t forget that the equity investment involves the risk of losing capital, in whole or in part, so we must train ourselves to properly manage that risk.