Neutral on Hormel Foods

Zacks Equity Research

We are maintaining a Neutral view on Hormel Foods Corporation (HRL).

We are optimistic on the company’s continuously improving operational efficiencies and pricing strategy. Hormel’s strategic brand building and marketing schemes have also been improving market share, while positioning it above its peers within the industry.

Hormel witnessed significant improvement across its segments’ positive sales momentum and rise in earnings per share during the second quarter of 2012. The supply chain efficiencies were also notable.

The company’s balance sheet holds a track record of high return and its favorable cash position allows the company to pursue suitable acquisitions/integrationsand brand building. Moreover, Hormel’s quarterly dividend declarationupholds its commitment toward returning value to its shareholders.

However, Hormel resorts to international brand acquisitions and exports as its strategy for growth. Therefore, the company is exposed to the risks of international operations including government intervention political issues, regulatory delays and fluctuating foreign exchange rates, which may disrupt operations and affect its profitability going forward.

Hormel’s operations over time have largely been affected by a rise in raw material cost of pork, poultry and feed grains. Rising cold storage charges continue to squeeze operating profits for the company as well.

The company faces stiff competition from its peers, such as ConAgra Foods Inc. (CAG), Kraft Foods Inc. (MDLZ) and Tyson Foods Inc. (TSN). The low-cost, regional manufacturers of processed food intensify competition. However, a positive export environment and an upside in packaged food prices hold optimism for driving the company’s revenue gain, for quarters ahead.

Hormel has a Zacks #2 Rank, which translates into a short-term (1-3 months) ‘Buy’ rating.

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