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Hormel (HRL) Down 5.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research
American Airlines (AAL) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

A month has gone by since the last earnings report for Hormel Foods (HRL). Shares have lost about 5.3% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Hormel due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Hormel Foods Q4 Earnings Beat, Sales Miss Estimates

Hormel Foods posted fourth-quarter fiscal 2018 results, with the bottom line improving year over year. However, dismal Grocery Products and Jennie-O Turkey Store led to lower-than-expected sales. This marked the company’s fourth straight quarter of sales miss.

Quarter in Detail

Quarterly earnings of 51 cents per share beat the Zacks Consensus Estimate of 46 cents. Moreover, the bottom line increased almost 24% year over year. The upside was backed by higher sales and benefits from tax reforms. Incidentally, effective tax rate during the quarter was 18.7% compared with 33.8% in the year-ago quarter.

Net sales came in at $2,524.7 million, which missed the Zacks Consensus Estimate of $2,556 million. Nevertheless, the top line inched up nearly 1.3% year over year backed by strength in the Refrigerated Foods and International divisions.

Further, Hormel Foods witnessed a 1% decline in volumes. The downside was mainly caused by lower volumes in the Grocery Products and Jennie-O Turkey Store segments. On an organic basis, net sales and volumes declined 3.4% and 3.3% respectively, year over year.

Segment Details

Grocery Products’ sales went down 4% to $658.8 million as gains from Wholly Guacamole dips and Herdez salsas were countered by declines in the company’s contract manufacturing business.

Revenues in the Jennie-O Turkey Store segment fell nearly 3.7% to $ 466.8 million owing to reduced whole bird volumes and sales.  

The company’s Refrigerated Foods segment generated sales of $ 1,232,7 million, up roughly 5.7% year over year. The upside was fueled by contributions from branded products like Hormel pepperoni, Applegate natural and organic products, Austin Blues authentic barbeque products as well as Hormel Natural Choice products. Additionally, the Columbus and Fontanini buyouts aided the segment’s performance. However, sales dropped 3% on an organic basis due to lower hog harvest volumes.

International & Other revenues were up about 7.3% to nearly $ 166.4 million. The upside can be attributed to Ceratti’s inclusion, increased export sales of SPAM luncheon meat and Skippy peanut butter. However, trade uncertainties weighed on fresh pork export volumes, sales and profits.

Costs/Margins

In the quarter, Hormel Foods’ cost of sales inched up 0.3% to approximately $1,987.3 million.

Selling, general and administrative expenses totaled $204.5 million, up from $194.2 million recorded in the year-ago quarter.

Operating income came in at $324.4 million, down 1.5%. Also, operating margin slid 40 basis points (bps) to 12.8%.

Balance Sheet/Cash Flow

Hormel Foods ended the quarter with cash and cash equivalents of $459.1 million and long-term debt of $624.8 million (excluding current maturities).

In fiscal 2018, Hormel Foods generated cash of $1,241.7 million from operating activities. Capital expenditure summed $390 million during the year. The company expects capital expenditures to be roughly $350 million for fiscal 2019.

During the fiscal, the company repurchased 1.4 million shares for nearly $47 million.

In a separate release, management raised the quarterly dividend rate by 12% to 84 cents per share from 75 cents earlier.

Outlook

Management stated that it will continue to augment portfolio strength through innovations and buyouts. The company expects solid cash flows in fiscal 2019.  Further, the company will ensure better business execution to counter global trade uncertainty and market volatility.

That said, the company envisions earnings in the range of $1.77-$1.91 in fiscal 2019. Further, net sales are expected in the band of $9.70-$10.20 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.65% due to these changes.

VGM Scores

Currently, Hormel has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Hormel has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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