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Hormel Foods Gains From Refrigerated Foods, Grocery Unit Weak

Zacks Equity Research

Hormel Foods Corporation HRL has seen its shares gain 8.7% in the past three months compared with the industry’s growth of 14.8%. The company is largely benefiting from strength of its Refrigerated Foods segment, which also somewhat cushioned it against weakness in the Grocery Products and Jennie-O Turkey Store units in the recently reported third-quarter fiscal 2019 results.

Shares of the company have gained 3.5% since the third-quarter earnings release. That said, let’s delve deeper and see if this Zacks Rank #3 (Hold) company is poised to sustain momentum.

Strong Refrigerated Foods Segment

Hormel Foods’ Refrigerated Foods category is steadily growing on the back of strong brand portfolio and effective strategies. Notably, during third-quarter fiscal 2019, the Refrigerated Foods unit managed to stay afloat despite the input cost inflation stemming from the African swine fever. The unit generated sales of $1,301.1 million, up roughly 1% year over year. The upside was fueled by products like Hormel Bacon 1, Hormel Fire Braised and Old Smokehouse as well as retail sales of Hormel Black Label and Columbus.

Moreover, operating profit increased 13.1% to $171.8 million, courtesy of higher profitability for value-added items, lower operational costs and increased commodity profits. Prior to this, the segment witnessed year-on-year revenue growth of 1.9% and 1% during the first and second quarters of fiscal 2019, respectively.

These upsides helped the company battle challenges in other segments and input cost inflation.

Will Momentum Sustain?

Hormel Foods’ third-quarter fiscal 2019 sales were dismal at the Grocery Products segment. Sales in this unit decreased about 11% to $543.1 million and volumes declined 10% due to the divestiture of CytoSport. Also, the sales decline at Skippy was a hurdle. This apart, operating profit at the Grocery Products unit plunged about 30% to $58.8 million due to CytoSport’s divestiture, considerably high avocado costs and unfavorable pricing of Skippy peanut butter. Fourth-quarter earnings in the Grocery Products unit are expected to bear the brunt of elevated avocado prices and dynamics at the peanut butter category.

Also, turkey market challenges have been troubling Hormel Foods for the past few quarters due to retail declines. Revenues in the Jennie-O Turkey Store segment lost 5.5% to $298.8 million during the third quarter of fiscal 2019, with volumes declining 4%. Additionally, softness in retail and foodservice sales was a deterrent. This apart, Hormel Foods continues to battle input cost inflation, stemming from the African swine fever in China. Also, global trade uncertainty is a hurdle for fresh pork exports.

Nevertheless, we expect the Refrigerated Foods segment to continue benefiting from value-added growth, effective pricing and innovation. This along with synergies from buyouts and brand strength should help Hormel Foods tide over the hurdles and sustain its impressive momentum.

Check These Better-Ranked Food Stocks

Pilgrim’s Pride PPC, with a Zacks Rank #1 (Strong Buy), has seen positive estimate revisions for 2019 in the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

General Mills GIS, with a Zacks Rank #2 (Buy), has a long-term EPS growth rate of 7%.

MEDIFAST MED, also with a Zacks Rank #2, has delivered positive earnings surprise in the trailing three quarters.

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