Having no idea to which company might be a potential buying opportunity (probably I should further expand my coverage spectrum) I went through best and worst performing companies over some periods of time. One which brought my attention was Hormel with a very weak 1 year performance.

I was looking at Hormel in December 2016 and I found company valued neutral/ a little bit too high. Well now level is the same, but as time flies valuation is getting more and more attractive (think of money which company generated over the last quarter). Let’s have a closer look.

First Quarter

– Record diluted earnings per share of $0.44, up 2 percent from 2016 EPS of $0.43

– Net earnings of $235 million, flat compared to 2016 net earnings of $235 million

– Sales of $2.3 billion, down 1 percent; Non-GAAP1 adjusted sales2 increased 3 percent

– Volume down 2 percent; Non-GAAP1 adjusted volume2 up 5 percent

Well, don’t expect rapid growth for such stable business. In fact it is interesting to see earnings growing for 15th consecutive quarter. I am wondering what share price reaction will be when company will show declining quarter. It must sometimes happen!

The Company is lowering its fiscal 2017 guidance to $1.65 to $1.71 per share due to challenging market conditions in the turkey industry. “The balanced model we have intentionally built in our business will allow us to overcome the challenges at Jennie-O Turkey Store. I remain confident in our team’s ability to deliver sales and earnings growth by supporting our brands, innovating, and making strategic investments,” Snee said.

 

Valuation didn’t change so much (this year consensus):

P/E = 20.9

EV/EBITDA = 12.1

Dividend yield is 2%, nothing special truth to tell. The only positive is that dividend is growing very fast.

 

If we look on the business from cash flow perspective:

–          Operating cash flow of around 1b

–          Investing cash flow of around 0.5b, quite a lot for stable business of this scale

–          It means cash flow for shareholders (more or less) 0.5b, not so much for $18b business…

 

Summing up, truth to tell when I am reading my last note I see no reason to change it: business momentum is good, results are growing and these factors should be supporting for Hormel Foods. Valuation for now is neutral/a little bit too high for me. I think that company can outperform market in the next year, but for me it is not a super opportunity to buy.

 

Disclosure HRL – no position