Volume growth is hard to come by in the food sector today, and even a very well-run company like Hormel Foods (NYSE:HRL) can't escape that forever. With health and economic factors translating into less animal protein consumption, and grain costs likely to work their way through the animal production cycle in 2013, these aren't the easiest of times for Hormel. Although I think the company's strong operating capabilities and focus on packaged/value-added foods will give it an edge on the likes of Tyson (NYSE:TSN) and Smithfield (NYSE:SFD), I'd be careful chasing the stock so close to a 52-week high and a double-digit EV/EBITDA ratio.
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Closing Fiscal 2012 on a Sluggish Note
All in all, Hormel had an OK fiscal fourth quarter, but not an especially impressive one - particularly considering the upside over at Tyson. What's more, management's guidance for below-plan growth in fiscal 2013 may not be surprising, but it does lend more weight to the idea that now may not be the best time to pay up for these shares.
Revenue rose 3%, as reported, on a 2% improvement in volume. Adjusting out acquisitions, it looks like organic growth was only on the order of 1% this quarter. Hormel's Grocery category saw almost 21% reported growth, with organic growth of more than 5% fueled by both volume and price improvements. Refrigerated sales were down more than 2% on flat volume, while Jennie-O revenue improved 5% despite a 2% volume decline. Specialty foods saw a better than 6% improvement in revenue, with another 2% volume decline.
All things considered (including a nearly 5% top-line miss), margins were pretty solid. Gross margin improved 20 basis points from last year, while operating income rose 8% on a 40bp improvement in margin. Grocery (+22%), Jennie-O (+5%) and Specialty (+8%) all saw income growth, while refrigerated was down 12% primarily on sizable losses in live hogs (roughly $12 million, or $40 per head).
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Management Seems Cautious, but Pragmatic, on Pricing
Listening to management's comments, it sounds like Hormel is going to be a little careful on pricing. While they are willing to raise prices in areas where they have share/product leadership (refrigerated pork and turkey, party trays), they are going to take more of an "after you" approach in sliced meats, letting rivals like Hillshire Brands (NYSE:HSH) and Kraft Foods (Nasdaq:KRFT) take the lead in pricing.
At the same time, the company is looking towards reaping the benefits of a full roll-out of its Mexican food portfolio, and new introductions (and advertising) in the Hormel Compleats line. I find that an interesting little detail, given that companies like Campbell Soup (NYSE:CPB), Heinz (NYSE:HNZ) and Smucker (NYSE:SJM) seem to all be stepping away from more active/aggressive advertising.
Cycles Come and Go, Brands Remain
While management seemed pretty enthusiastic about those Compleats launches, the SPAM family, and its party trays, they nevertheless sounded more cautious notes about 2013. Higher grain prices are going to hit the turkey business, and tighter hog supplies are likely to impact the business as well.
None of this is exactly new; with corn prices rocketing through the summer, most people saw it as a "when, not if" that those prices would lead to higher prices and tighter supplies as smaller operators struggle to stay profitable. The good news is that Hormel has seen plenty of cycles before and it is less dependent upon the commodity protein markets than companies like Tyson and Smithfield.
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The Bottom Line
I've said it before, but Hormel is a great business where the stock is very seldom ever trading at a great price. So too now, as even if I assume that Hormel can grow its free cash flow by nearly 10% a year for the next decade, that only produces a fair value in the low $30s. Consequently, I'll continue to wait on the sidelines in the hopes that a market pullback or a Hormel-specific freakout (perhaps tied to higher input prices in 2013) gives me a chance to add shares at a more compelling multiple.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.