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.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

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).

SEE: Understanding The Income Statement

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.

SEE: 5 Must-Have Metrics For Value Investors

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.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center