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Hormel Retains Neutral Rec

Zacks Equity Research

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

Hormel’s retail penetration into branded meat products, enhanced portfolio of value-added grocery items and its strategic pricing actionshave over time been providing impetus to the company’s sales. This paints an encouraging picture positioning Hormel as brand name within the industry.

The company’s gains from the International segment, positive export environment and marketing schemes look impressive. We hope to see enhanced operational efficiencies which, we believe, will improve the company’s profitability later in the year.

With the net sales upside recorded in the first quarter of 2012, management continues to look for slowly improving results from its Refrigerated Foods segment as pork operating margins return to more normalized levels. Sales in the Grocery Products segment and Meat Products group are also anticipated to improve in the coming quarters, effectively with the company’s new advertising campaigns supporting HORMEL and SPAM brands.

Marked by the gradual improvement in the foodservice industry, the company expects Foodservice Group and Specialty Foods to build upon their solid start and hold up the prospects for better future ahead.

To strengthen its growth profile, Hormel maintains a favorable cash position and is financially well poised to pursue further acquisitions/integrationsin the near future.

However, Hormel’s strategy to grow through acquisitions imposes several potential risks for the company. Its international operations and acquisitions expose it to fluctuating foreign exchange rates owing to the appreciation of a foreign currency against the US dollar. Risks and dilemma associated with foreign operations like government intervention, political issues, regulatory delays, etc. may not be overlooked.

Worthy of mention, the company’s operations are not free from risks. The production and sale of meat and food products is highly competitive. The company faces stiff competition from the manufacturers of pork and turkey products, national and regional producers of other meat and protein sources as well as from low-cost regional manufacturers of processed food.

Therefore, in order to survive the competition without having to compromise on quality, Hormel necessarily incurs a higher cost of manufacturing for value-added, differentiated products.

Over time, the raw material cost for the company has climbed steadily. Adding to the risk is the rise in cold storage charges and supply uncertainty of pork, poultry and feed grains. This, we anticipate, may compress sales and squeeze operating profits in the coming quarters. Moreover, the company has been facing an oscillating demand scenario for its products due to constantly changing market forces. This may hamper profitability going forward.

Even under such pressures, hope remains as we observe the company’s commitment toward returning value to its shareholders and dedication to a fair allocation of its resources.

Based in Austin, Minnesota, Hormel Foods Corporation is a leading manufacturer and marketer of various meat and food products in the United States and internationally. The company faces stiff competition from ConAgra Foods Inc. (CAG), Kraft Foods Inc. (KFT) and Tyson Foods Inc. (TSN).

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

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