Hormel's Upbeat Results - Analyst Blog

Hormel Foods Corporation (HRL) posted strong results for the fourth quarter and fiscal 2010 with an EPS of 90 cents and $2.92 compared with 77 cents and $2.53 in the respective period of fiscal 2009 based on  increases of 23.2% and 10.5% in revenue in the respective period.

Fourth Quarter Highlights

During the quarter, Hormel reported EPS of 90 cents, 16.9% up from 77 cents in the year-ago quarter and also up from the Zacks Consensus Estimate of 79 cents. Net income reached $121.1 million from $103.9 million in the fourth quarter of 2009. The increase was driven by revenue growth coupled with cost maintenance.

During the quarter, net revenues were $2,063.0 million, up 23.2% from $1,675.1 million in the corresponding period of the previous year and $1,891 million according to the Zacks Consensus Estimate. This increase is attributable to increased revenues in Jennie-O Turkey Store and Refrigerated Foods segments.

Revenues from Jennie-O Turkey Store spiked 19.1% and Refrigerated Foods shot up by 26.3% due to the higher demand for food products based on the gradual improvement in economic conditions. Revenues from Grocery Products grew 23.7% and Specialty Foods grew 12.1% year over year.

The Refrigerated Foods segment finished the quarter with a 22.2% increase in operating profit and Jennie-O Turkey Store witnessed a strong improvement of 89.7% in profit based on the increase in the price of  commodities. Segment profit for Specialty Foods and Grocery Products declined 6.4% and 6.2% year over year, respectively based on higher raw-material costs.

Selling, general and administrative (SG&A) expenses based on revenues declined by 40 basis points to reach $166.5 million.

Annual Highlights

During fiscal 2010, net income stretched 15.4% year over year to $395.6 million from $342.8 million in the previous year. EPS reached $2.92 from $2.53 in fiscal 2009 as opposed to $2.91, the Zacks Consensus Estimate.

Net revenues were $7,220.7 million, up 10.5% from $6,533.7 million in the previous year and $7,046 million according to the Zacks Consensus Estimate.

Revenues from Grocery Products and Refrigerated Foods shot up by 12.5% and 11.1% respectively. Revenues from Jennie-O Turkey Store went up by 6.7% and Specialty Foods grew 10.5% year over year.

The Refrigerated Foods segment, Jennie-O Turkey Store, and Specialty Foods reported strong operating profit margins of 22.2%, 65.3%, and 17.9% respectively. However, Grocery Products reported an operating loss of 4.1%.

Selling, general and administrative (SG&A) expenses based on revenues declined by 30 basis points to reach $605.3 million.

At the end of fiscal 2010, Hormel wiped off its entire long-term debt burden of $350 million and reclassified into current maturities. At present, the company has sufficient cash and cash equivalent and marketable securities of $467.8 million, an increase from $427.1 million at the end of the previous quarter, to meet its debt burden of $350 million. Thus, the company has strong liquidity positions.

Outlook

Hormel initiated EPS guidance for fiscal 2011 and expects it in the range of $3.10 - $3.20.

With several acquisitions including the recent Don Miguel, Hormel has been strengthening its position. Moreover, given the company's strong balance sheet with no long-term debt burden we expect acquisitions to play a key role in the company's growth going forward.

Although the food market is highly competitive, a greater share of value-added branded products in Hormel's product-mix will help it to strengthen its margins and reduce exposure to commodity prices in the long term. However, intense competition from competitors like ConAgra Foods Inc. (CAG), Kraft Foods Inc. (KFT), and Tyson Foods Inc. (TSN) together with huge dependence on raw materials do not bode well. Thus, we maintain our Neutral recommendation on the stock. The stock currently retains its Zacks #4 Rank (short term “Sell” rating).

 
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