Hormel Is Overpriced, But There’s A Reason
Hormel (NYSE:HRL) is by far one of the better consumer staples companies on the market. The downside for investors is that, with such a fine pedigree, it is a stock people want to own and that tends to keep share prices up. Trading at 27X this year’s and 26X next year’s earnings it is among the most highly-valued in the group but there is a reason. The company has one of the best portfolios of brands on the market, a robust presence in both the consumer and foodservice verticals, and a repositioning program that has it growing at a mid-single-digit rate organically with acquisitional growth on tap as well. In that light, the 27X earnings isn’t as high as could be which makes us think a reacceleration of HRL’s long-term uptrend is about to get underway.
Hormel Has Mixed Quarter, Outlook Good
Hormel had one of those mixed quarters that was only mixed because of the analysts. The company produced $2.46 billion in revenue, 3.4% more than this same time last year, and beat the consensus by 380 basis points but earnings were only as expected. Revenue was driven by strength in all four operating segments which also, coincidentally, returned to top-line growth as well.
On a segment basis, all four segments saw topline growth but most in the range of 1%. Both Grocery and International outpaced the group with gains of 7% and 13% despite a decline in total volume in the International segment. International results were driven by product-mix that shifted toward branded products and growth in emerging markets. In the U.S., the company reports retail is up 13%, deli 7%, and foodservice down 17% but there is a ray of light for the foodservice segment. The company says its seen a pick-up in order volume it believes foreshadows a recovery in the restaurant industry.
“We expect this steady improvement to continue throughout the year. We have been successful in a number of critical categories, and we will continue to make progress across the portfolio. Our retail business continued to perform extremely well, with sales increasing 13% for the quarter. Brands such as SPAM, SKIPPY, Hormel Chili, Hormel Black Label, AppleGate, Hormel Pepperoni, Lloyd's, Hormel Fully Cooked entrees, and Justin's all delivered very strong growth,” said CEO Jim Snee in the conference call.
Regarding earnings, the revenue gains did not carry through to the bottom line primarily due to the company’s increased tax rate and weakness/deleveraging in the Foodservice segment. The good news is that the Foodservice business is already picking up so margins should see a favorable impact as soon as the current quarter. Moving down to the bottom line, the $0.41 in reported revenue is down 9% from last year and only in-line with the consensus.
Hormel’s Free Cash Flow Rose 27%, The Dividend Is Safe
The great news for dividend-investors is that cash-from-operations is up 9% and FCF from operating is up 27%. This strengthens the already fortress-balance sheet and sets the company up well for a 21st increase at the end of the fiscal year. The last increase was only 5% but the long-term CAGR is above 10% and the income warrants it so we expect the 2022 increase to be in that range. Until then, investors can sit tight knowing the 2.0% yield is safe and sound.
The Technical Outlook: Hormel Is In A Long-Term Uptrend
Shares of Hormel made a strong rebound from the March 2020 low but ultimately spend the last year range-bound while others in the group made strong rallies. The difference may lay in the valuation, the cheapest stocks in the group trade near 10X earnings, but that trend may be over. Hormel is in a long-term, multi-year, secular uptrend driven by its continued success as a consumer staple leader. In that light, with growth accelerating, this stock is indeed a good buy.
Featured Article: What are Bollinger Bands?7 Semiconductor Stocks Set to Gain From the Chip Shortage
Who knew that something so tiny could create such a big problem? However, that’s the case with the semiconductor industry. Chip manufacturers are facing supply chain disruptions due to the Covid-19 pandemic.
Semiconductors are in high demand for the big tech companies who need the chips to power the servers for their data centers. But they are also needed for much of the technology we take for granted including laptops, tablets, mobile phones, gaming consoles, and automobiles – a sector that seems to be at the root of the current crisis.
Any weekend mechanic knows that even traditional internal combustion cars are heavily reliant on electronics. In fact, electronic parts and components account for 40% of a new, internal combustion vehicle. That’s more than doubled since 2000.
However as it turns out, some manufacturers may have overestimated how soon consumers would be ready for an “all-electric” future. And that meant that they didn’t forecast how much demand there would be for the kind of chips needed to do the mundane, but vital tasks of steering, braking, and even powering windows up and down.
Part of the problem is that U.S. businesses are heavily reliant on countries like China and Taiwan for their semiconductors. In fact, only about 12.5% of semiconductor manufacturing is done in the United States.
Of course, this creates a tremendous opportunity for the companies that manufacture these chips. And it comes at a good time. The semiconductor sector is notoriously cyclical and was coming down from the elevated demand for the 5G buildout.
In this special presentation, we’ll give you a list of seven semiconductor companies that you can invest in to take advantage of this opportunity.
View the "7 Semiconductor Stocks Set to Gain From the Chip Shortage"
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