Will Investors Have an Appetite for Meat Producers' Stock in 2016?
Positive outlook for earnings
For 2016, Hormel Foods (HRL) raised its EPS (earnings per share) guidance to $1.50–$1.56. This represents a 14%–18% increase over fiscal 2015. Management mentioned that strong earnings led by Refrigerated Foods, Grocery Products, and Specialty Foods along with a positive momentum at the Jennie-O Turkey Store gave the company confidence to raise the guidance range. Tyson Foods (TSN) also raised its fiscal 2016 EPS guidance to $3.85–$3.95 due to its strong results in the current quarter and positive outlook for fiscal 2016. Factors that gave Tyson’ management confidence to raise its earnings guidance include the company’s superior supply chain and consumer-relevant portfolio packed with advantaged brands in advantaged categories. This represents a 22%–25% increase over fiscal 2015.
Wall Street analysts expect an 18% and 27% rise in Hormel and Tyson’s earnings for fiscal 2016. Sanderson Farms (SAFM) didn’t provide any guidance. However, analysts estimate Sanderson Farms and Pilgrim’s Pride’s (PPC) earnings to fall by 37% and 22% in fiscal 2016, respectively.
Revenue expected to fall
Analysts project revenue for the upcoming quarter to decline for all of these companies except Hormel Foods. Tyson, Sanderson Farms, and Pilgrim’s Pride are expected to report a fall in revenue of 16%, 7.1%, and 3.6%. respectively, for their upcoming quarters. Instead, Hormel is expected to generate higher revenue of 13% in the next quarter. The export markets are expected to face challenges in 2016. This could hamper the revenue.
Pilgrim’s Pride plans to expand production
On February 16, Pilgrim’s Pride announced a $190 million strategic capital investment plan to enhance growth with key customers. It expanded the production of Pilgrim’s Pierce Chicken brand. This investment strategy is part of the company’s focused effort to reinvest its cash flow back into its business. The objective is to support sustained margin growth and improve efficiencies consistent with the company’s continued pursuit of operational excellence. This investment strategy was initiated in 4Q15. The cash flow reinvestment plan is designed to meet customer needs through targeted capital spending in feed production, fresh chicken, and prepared foods.
The Guggenheim S&P Equal Weight Consumer Staples ETF (RHS) and the PowerShares S&P 500 High-Quality Portfolio (SPHQ) invest 2.6% and 1.5% in Hormel.
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