I first had a look on Hormel Foods at the beginning of March and I found company really expensive (read more about company: Hormel Foods – can it be more expensive?). Share price was then at around $44. Since that time share price dropped to $35 so around 20%. I was right, but I didn’t make any money on it (having short position is a very risky bet). Fortunately I did not lose either. Is company an attractive buy at current share price level?

 

First let’s have a look on valuation:

EV/EBITDA ~ 13

P/E ~ 21

Dividend yield ~ 1.7%

In my opinion valuation is still demanding and dividend yield is rather low (I see that in previous note I made a mistake with dividend yield. This is because there was a split of shares and I should adjust pre-split dividends, sorry).

 

Secondly let’s have a look on competitors:

  • Tyson Foods (TSN) – performance since March around -9%
  • ConAgra Foods (CAG) – performance since March around +8%
  • Sanderson Farms (SAFM) – performance since March around -9%

Comparing Hormel Foods to peers and S&P500 (around +1,5% since March) company is strongly underperforming so I assume it is mostly due to company specific factors.

 

Lately company raised guidance for 2016 year by 5 cents to $1.56–$1.60. This is a good news so either investors expected more or there are some other issues. Business in second quarter was good with EPS increasing by 21% to $0.40.

 

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Maybe investors are worried about acquisitions (although historically Hormel was in my opinion successful in this field). Buying Justin’s for around $286m is in my opinion rather expensive taking into account expected sales of around $100m in FY2017. Nevertheless I do not know how high synergies are expected.

Also there is a risk of Avian Influenza for meat product producers, nevertheless in my opinion this risk should not be exaggerated. There will always be flues/viruses and company is definitely well prepare to deal with this short term issue.

 

Summing up, although share price dropped a lot from a peak I think that shares are still pricey and I am not interested in buying shares at this level. I will reconsider at $25.

 

Disclosure HRL – no position