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Hormel: It’s Not Just Spam

The Exchange

Spam. It's always Spam.

You get a kick out of it. So does its maker. This week saw investors get another nice quarter from Hormel (HRL), the Austin, Minn., food company that's behind the canned pork product, and naturally Spam was at the center of the conversation.

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Hormel canned foods
On Thursday Hormel posted a third-quarter profit of $111.2 million, up 13% from the prior-year period, and earnings per share increased to $1.37 from $1.31. Sales for the quarter were $2 billion, up 5% year over year.

But sure enough, right there in the press release, Hormel gives thanks to the little product that's so popular in the 50th state. Chairman and CEO Jeffrey M. Ettinger took time to point out that the company's grocery products segment benefited from strong sales of the Spam line.

Go a little deeper though, and you'll see this isn't a one-day story about the blue and yellow can. The grocery products group in total made up 15% of Hormel's net sales in the most recent quarter. That's less than the Jennie-O Turkey Store division, which accounts for 18% of sales. Refrigerated foods -- bacon, deli meats, pepperoni -- consistently account for more than half of Hormel's top line.

As discussed last week regarding Smucker (SJM), Hormel is another staples company that has gone steadily in the right direction if you're long. During the past five years, Hormel's sales have a compound annual growth rate of 6.6%, and net income is up 10.6% annually, FactSet says. Free cash flow has a five-year CAGR of 16.3%.

That's all well and good, but what matters to investors is whether they make money. Lo and behold, they do. FactSet data go back to November 1984 on the stock, and since then, it's up more than 5,100%. Dividends began in the 1920s, and they keep heading higher. Right now, the yield is 2.1%.

If you don't like dealing with severe ups and downs in equity indices, Hormel's got you covered with low price volatility relative to the market overall -- a beta of 0.37. At the same time, it's up 172% since the beginning of 2000, while the S&P 500 is right where it was. And last month, the stock had its best close ever (after splits), at $30.68.

The downside is that the past year hasn't been as rewarding price-wise, as the shares are only 1.4% ahead of where they were 12 months ago. During that time, the stock has traded in a range, including intraday levels, of $25.87 to $30.70. Hormel's basically flat performance is well behind its calendar-year average price appreciation of 11.3% in the last half decade, so it has significant ground to make up in the months ahead if it wants to keep pace.

Clearly, that might not be easy for any company over a third of a year, and for Hormel, it wouldn't be in character. To do so, the shares would need to reach roughly $32.60 by the time 2013 arrives, and from the current trading price of $28.84, that would be a climb of some 11.5%. In the prior five years, the period from the start of September through the end of December has seen Hormel average an increase of 7.2%, Yahoo! Finance data show.

Past performance, good or bad, is no guarantee of the future, but there you have it. Also worth remembering for Hormel, as this Investopedia article notes, is the possibility that the severe drought of recent months could drive up some of its product costs and potentially weigh on results.

How does it stack up against some other food stocks? From a basic valuation perspective, Hormel's got a forward price-to-earnings ratio of 14.9, putting it above Tyson (TSN) and ConAgra (CAG), but behind Kraft (KFT) and B&G Foods (BGS), the latter of which has a market capitalization around one-fifth of Hormel's. Return on equity for Hormel is 17.8%, whereas B&G comes in at 23.8%, and General Mills (GIS) registers 24.5%. Hormel beats ConAgra and Smucker on that measure.

The bottom line, is this: If you like jumping in and out of the same name, this one probably isn't your mark. But if your time horizon is years, not hours or minutes, it's another reminder that slow and steady, like Hormel, can have plenty of payoff. With or without Spam.

What's your take? Do you own food stocks, and if so, what do you like and dislike?

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