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Pork and Turkey Market Woes Hurt Hormel Foods' Prospects

Zacks Equity Research

Adversities in the pork and turkey market as well as rising input costs have made matters sour for Hormel Foods Corporation HRL. Such downsides have caused this Zacks Rank #5 (Strong Sell) company to lose appeal among investors. The stock has declined 3.2% in the past six months compared with the industry’s rise of 21.3%. Let’s take a closer look at the factors that have made this meat and other food products company an unappetizing pick.

Weak Units Dent Performance

An unstable tariff environment is a major deterrent for the company’s pork business. Evidently, higher tariffs have exerted pressure on fresh pork export volumes, sales and profits in the International division during the second quarter of fiscal 2019. Similar headwinds were also present during the first quarter of fiscal 2019, as well as the fourth and the third quarter of fiscal 2018. In fact, we note that management’s expectations regarding the dynamics of the pork industry in the long run compelled the company to sell its Fremont processing facility to WholeStone Farms in December 2018.

Further, turkey market challenges have been troubling Hormel Foods for the past few quarters.  Though sales in the Jennie-O Turkey Store segment moved up in fiscal second quarter, the unit was persistently hurt by retail declines. During the first quarter, revenues in the Jennie-O Turkey Store segment inched down roughly 0.5%, preceded by a decline of nearly 3.7% in fiscal fourth quarter of 2018. Further, the company slashed expectations for the Jennie-O Turkey Store segment, as it continues to invest in the segment to regain retail distribution.

Input Cost Inflation

We note that the company’s fiscal second-quarter results were hampered by input cost inflation. This stemmed from the African swine fever in China, which weighed on the hog and pork markets. Further, it expects input costs to remain high and impact profits in the Refrigerated Foods, Grocery Products and International categories in the second half of fiscal 2019.

Wrapping up

Expectations of persistent volatility in the turkey and pork markets along with high input costs have compelled management to lower fiscal 2019 guidance. The company expects net sales of $9.5-$10 billion compared with the previous outlook of $9.7-$10.2 billion. Further, it envisions earnings in the range of $1.71-1.85 per share, down from the previous guidance of $1.77-$1.91.

We note that management is undertaking efforts like strengthening brands through innovation and pricing actions to counter inflation. However, these measures are yet to bear positive impacts and revive the company’s lost sheen.

Disappointed With Hormel Foods? Check These Solid Food Stocks

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