On Dec 3, we reiterated our Neutral recommendation on Hormel Foods Corporation (HRL), based on the company’s strong organic growth prospects. However, rising costs and reduction in supply of raw materials remain challenges.
Why the Reiteration?
Hormel’s organic growth has been solid and its future looks promising. Most of the segments are performing well, recording year-over-year increases. Additionally, the diversified product offerings of the company help offset losses from its other businesses. In the fourth quarter of fiscal 2013, all the segments except the Specialty Foods segment registered rise in both revenues and operating profits.
Furthermore, Hormel has been growing inorganically in the recent past. In the fiscal fourth quarter, the company completed the proposed acquisition of the Skippy peanut butter line in China. This is expected to drive the company’s revenues higher.
However, Hormel’s strategy to grow through acquisitions exposes it to several risks. The cost of acquisition could impact its financial conditions. In addition, acquisitions outside the United States may present unique challenges such as government regulations, foreign currency fluctuation and others.
In addition, rising costs as well as reduced supply of raw materials like pork, poultry and feed grains along with other products have been impacting the company’s margins for quite some time. In the fourth quarter of fiscal 2013, Hormel experienced a rise in input costs, especially hog costs. It also expects higher input costs for beef in fiscal 2014, which will raise total costs for the company.
Other Stocks to Consider
This Zacks Rank #2 (Buy) company currently has a market capitalization of $12.1 billion. Other stocks to watch out for in the industry include Omega Protein Corp. (OME), ConAgra Foods, Inc. (CAG) and The Hain Celestial Group, Inc. (HAIN). While Omega Protein has a Zacks Rank #1 (Strong Buy), ConAgra and Hain Celestial Group hold a Zacks Rank #2.
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