Hormel Foods Corp (NYSE:HRL) has recently seen a daily gain of 1.39%, despite a 3-month loss of 2.56%. With an Earnings Per Share (EPS) (EPS) of 1.61, we are left to question: Is the stock modestly undervalued? This article aims to provide a comprehensive valuation analysis of Hormel Foods, taking into account its financial strength, profitability, and growth. We encourage readers to delve into the following analysis to understand the intrinsic value of Hormel Foods.
Hormel Foods, historically a meat-focused company, has broadened its product lineup to include other protein offerings, evolving into a branded food company. The company sells its products through multiple channels, including U.S. retail, U.S. food service, and international markets. Major brands include Hormel, Spam, Jennie-O, Columbus, Applegate, Planters, and Skippy, many of which hold the number one or two market share in their respective categories. The current stock price stands at $39.33 per share, with a market cap of $21.50 billion. However, the GF Value, an estimate of fair value, is $50.13 per share. This discrepancy paves the way for a deeper exploration of the company's value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock. It is calculated based on three factors: historical trading multiples, a GuruFocus adjustment factor based on the company's past performance and growth, and future estimates of business performance. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
As per the GuruFocus Value calculation, Hormel Foods Corp (NYSE:HRL) appears to be modestly undervalued. With its current price of $39.33 per share and a market cap of $21.50 billion, the long-term return of its stock is likely to be higher than its business growth due to its relative undervaluation.
Assessing Financial Strength
Before investing in a company, it's crucial to assess its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. Hormel Foods has a cash-to-debt ratio of 0.21, which ranks lower than 66.37% of companies in the Consumer Packaged Goods industry. However, the overall financial strength of Hormel Foods is 7 out of 10, indicating fair financial health.
Evaluating Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, poses less risk. Hormel Foods has been profitable over the past 10 years with an operating margin of 9.18%, ranking better than 70.66% of companies in the Consumer Packaged Goods industry. This strong profitability, combined with a 3-year average annual revenue growth rate of 9.2%, indicates potential value creation for shareholders. However, the 3-year average EBITDA growth rate is 4.5%, which ranks worse than 53.08% of companies in the industry.
ROIC vs WACC Comparison
Another way to evaluate a company's profitability is by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. Over the past 12 months, Hormel Foods's ROIC is 7.66 while its WACC came in at 6.16.
In conclusion, Hormel Foods Corp (NYSE:HRL) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 53.08% of 1526 companies in the Consumer Packaged Goods industry. To learn more about Hormel Foods stock, check out its 30-Year Financials here.
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This article first appeared on GuruFocus.