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Hormel: Another All-Time High for the Spam Seller

The Exchange

If we keep talking about it, one day we might actually jinx Hormel's (HRL) stock -- but we're not there yet.

Hormel chili products: Credit AP

Shares of the Austin, Minn., food company were up 1.6% Thursday to $36.74, a level that, if it holds, would be an all-time closing high. This came after the maker of Spam, bacon and canned chili raised its full-year profit forecast following a first quarter in which it met estimates of 48 cents a share. Sales of $2.12 billion were slightly under the $2.14 billion consensus.

As the top line suggests, it wasn't a perfect fiscal period for Hormel. At the Jennie-O Turkey Store division -- around 18% of revenue -- sales of $390.3 million missed expectations by $5 million, and the segment's operating profit fell 23% from the prior year. Results there are likely to be weaker than 2012, the company believes. Refrigerated foods, half of Hormel's total sales, declined 1.9% to $1.06 billion, finishing shy of Wall Street's outlook of $1.10 billion. Operating profit in the largest unit was essentially unchanged.

Regardless, the numbers still were enough to get management to raise their full-year earnings projection by 3 cents to a range of $1.93 to $2.03. The average analyst estimate is $1.97. That improved view clearly helps for shares that have been very good to their owners. [For more details, Seeking Alpha has the earnings call transcript.]

In the past five years, Hormel has a mean gain of 10.9% annually, according to FactSet. Going back 20 years, the stock has had three times when it closed the year lower than where it started. The most recent was in 2008, when it was down 23%. In 2002 it fell 11% and in 2000 it was off 6%.

So far in 2013 Hormel is off to quick start, surging 13%. As a result, it's well past the average $32 target of the analysts who follow the company. Look at a series of valuation measures, and it may appear it's in danger of getting pricey. For example, its forward price-to-earnings and enterprise value-to-sales ratios are at or near five-year highs and are in excess of the average for the past half decade.

Hormel Valuation

Source: FactSet

That's not to say any of it will matter when Dec. 31, 2013, arrives, only that it bears watching. Do know, however, that in seven of the past 10 years, Hormel has had a higher earnings multiple than the S&P 500, and from October 2003, the stock has risen 207%. The S&P is up less than one-quarter of that. Getting overly anxious here might be a waste of time, in other words.

Making fun of packaged meats, especially Spam, is pretty easy. Food snobs might wish the Hormels of the world didn't even exist. Investors shouldn't care and they probably don't, since the shares rise again and again, while the dividend continues to get lifted. Again, note today's record trade. The yield generally stays at a modest level around 1.9%, influenced as it is by the continued price appreciation, though, as is the case with consistent dividend companies, it's at least some income assurance.

At 17.8 times earnings now, Hormel's trading area isn't out of line with ConAgra's (CAG) 14.2, B&G's (BGS) 19.6 and Mondelez International's (MDLZ) 17. Tyson (TSN) comes in around 11. No metric is infallible, naturally, and even a set of them can't be relied upon to predict the future. That said, Hormel's shares historically haven't been too caught up in any of that, since the stock keeps forging ahead. It might turn into a laggard one of these days, but for the time being, it's just another new high.

You tell us: Is Hormel ready to head lower? Or are the gains for the stock going to continue this year?