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Time To Buy More Hormel Foods (NYSE:HRL), But Wait For Lower Prices

Wednesday, August 26, 2020 | Thomas Hughes
Time To Buy More Hormel Foods (NYSE:HRL), But Wait For Lower Prices

Hormel Is A Post-Pandemic Winner And Highly Valued

There are many reasons why Hormel Foods (NYSE:HRL) stock has done so well during the pandemic. To start, the company is a blue-chip consumer staple with a long history of steady, even returns. In times of trouble, those kinds of stocks are among the first the market turns to. Adding fuel to the fire is the dividend. Among the stocks most-loved in times of trouble are the higher-yielding dividend growers and Hormel Foods is one of those.

In addition, the pandemic itself heightened Hormel’s appeal by accelerating business. The pandemic caused a major shift in how Americans eat and Hormel was well-positioned for those trends. Now, with a double-tailwind emerging in economic recovery, the stock is poised to see its growth accelerate. But does that make it a buy? Trading at over 31X this year’s and next 30X next year’s earnings it is no bargain compared to its peers.

"We expect the fourth quarter to mirror many of the dynamics we saw in the third quarter, including strength from our retail businesses and the ongoing recovery in our foodservice business," said CEO Jim Snee. "However, the magnitude of additional recovery in the foodservice industry, the performance of the entire food supply chain and the state of the broader economy remain highly uncertain."

Nothing Surprising In Hormel’s Report

Hormel’s FQ3 earnings report is good but there is nothing the analysts didn’t expect. Revenue grew 3.9% to $2.38 billion on a 4% increase in volume driven by a 3% increase of organic sales. Weakness in the wholesale/foodservice segment were more than offset by strength in the retail/food-at-home segment. Regarding the wholesale segment, sales to foodservice businesses are rebounding and expected to gain strength in the current quarter.

On the bottom line, GAAP EPS of $0.37 beat consensus by $0.02 do to a slight beat in margins. Margins shrank by 70 basis points to 10.5% but came in above the 10.1% expected. The only negative in the bottom line figures is that earnings growth is flat on a YOY basis.

On a reported segment basis, sales of grocery items increased by 7% to lead the business. Grocery accounts for about a quarter of all revenue on a quarter to quarter basis. Sales of refrigerated products, the largest segment at 57% of sales, increased by 5.0%. The only weakness is in the Jennie-O-Turkey Store with net sales declining -4.0% but it is one of the smaller segments of the business and only 12% of total sales.

Hormel’s Dividend Is Safe And Still Growing

Hormel’s attraction as a dividend payer has not lessened but its yield could be higher. With the stock trading at all-time high levels, the yield is only 1.75% compared to the 2.0% to 2.25% it used to pay, and the 2.5% to 4% you can get with some of its peers. That said, Hormel is a dividend-grower with 20 years of increases to its credit and a high-expectation for an aggressive increase later this year. The payout ratio is running about 55% earnings and free-cash-flow is unhindered by debt.

Over the last quarter total cash flow improved by 59% due to a combination of factors that are likely to persist over the next year. Demand for the company’s product has inventory down freeing up cash and increasing accounts payable. Couple this with the 16% 5-year CAGR for the dividend and it adds up another big increase during the calendar 2021 reporting cycle.

The Technical Outlook: Hormel Is A Buy, But Not At These Levels

I don’t see anything wrong with Hormel fundamentally but at these levels, I would want to wait for prices to pull back before buying. Trading at 31X, now 30X earnings Hormel is as highly valued as Clorox and Clorox is the hands-down #1 winner from the pandemic.

Tuesday’s price action has the stock showing a top and I think the selling might only be getting started. A move lower on profit-taking could take this stock down to the short-term EMA at $51.20 if not a little lower. Once the price comes down a bit and supports start to show itself I would be a buyer again. Until then I’d focus more on consumer staples with lower valuations and higher yields

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7 Stocks That Could Benefit From a Capital Gains Tax Hike

One thing every investor needs to learn is the effect of capital gains on their investments. Every time an investor sells a stock that has appreciated in value, that capital gain is subject to being taxed. Stocks that are held for less than a year pay a short-term capital gains tax rate. Stocks that are held for over a year pay a long-term capital gains tax rate.

In general, a capital gains tax hike is a bearish indicator for stocks. However, there are a couple of strategies that can help investors avoid some of the tax hit. One strategy is to keep your investments in an individual retirement account (IRA) or 401(k). However many higher-income earners want to have more access to the funds in their brokerage accounts.

A sound strategy for these investors involves buying dividend stocks. Dividend income is also taxed (unless it is reinvested), but typically when the capital gains tax rate is raised, the dividend income rate stays the same. This makes dividend stocks more attractive.

Investing in dividend stocks is never a bad idea, but at times when the capital gains tax rate is favorable, growth stocks provide a better reward for investor capital. But when long-term capital gains tax rates go up, those gains can get expensive.

In this special presentation, we’ll give you seven stocks that have a nice dividend yield and a strong story to go along with them.

View the "7 Stocks That Could Benefit From a Capital Gains Tax Hike".

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Hormel Foods (HRL)1.9$46.55-0.1%2.11%27.87Hold$46.25
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