Don’t Delete Spam, Eat it

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Sometimes we start at the top. This time we started at the bottom.

We’ve covered the consumer packaged goods sector extensively including the ever popular Beyond Meat (BYND).

This time, we wanted to start with a less popular company, one searched regularly by financial pros but not at the top.

We figured there might be hidden value down there, especially in the consumer goods category.

You see, when the economy slows down, and inflation runs wild, it forces consumers to change their behaviors. 

Instead of going out to a fancy restaurant or eating out, they may decide to eat in more and cook. 

For those in truly desperate times, you have options like canned tuna, and ramen noodles. And of course, the King of Recession Foods, has to be SPAM. 

But is the maker of SPAM, and SKIPPY, Hormel Foods (HRL), recession-proof? And is the stock a buy at these levels?

Check out our thoughts below…

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Hormel Foods’ Business

Hormel Foods (HRL) owns a portfolio of over 50 food brands, found in stores in over 80 countries. Some of its iconic brands include Hormel, Chi-Chi’s, Dinty Moore, Planters, SPAM, SKIPPY, and Jenni-O.  

In fact, over 40 of its brands are ranked Number 1 or 2 in their categories. And its SKIPPY peanut butter produces more than 90 million jars each year. 

HRL operates its business in four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. 

Here’s how those segments performed in Q2 2022:

Q2’s $3.09 billion in net sales, is a record for HRL, and its sixth consecutive quarter of record sales, an 18.8% climb over the prior year.

Financials

One way to tell if a company is doing well or not is to check out its revenues, and to try to notice any trends. 

The trend is clear with HRL, revenues have been consistently rising over the last decade. 

However, investors care about cash flow from operations probably more than any other single line item. 

Hormel doesn’t disappoint in this area with Q2 2022 increased cash flow from operations by 29% or $193 million. 

The company’s $1.22 billion in cash from operations is significantly better than the sector median of $370.7 million, and HRL’s 5-year average of $1.07 billion. 

Furthermore, HRL is sitting pretty from a liquidity standpoint. The firm has a current ratio of 2.28x, which means it can easily pay its short-term obligations. 

Investors will also be happy to hear that HRL is a dividend stock. It pays shareholders $1.04 per share annually in dividends. 

Valuation

HRL has a P/E GAAP ratio of 27.31x, which is actually higher than the sector median of 20.66x. And slightly higher than its 5-year average of 25.3x. Part of that stems from the incredible growth and profitability compared to its peers.

Additionally, HRL carries a price-to-sales ratio 2.08x, which is significantly higher than the sector median of 1.16x. And while that does not compare well, HRL has averaged a price-to-sales ratio of 2.35x. 

Valuation isn’t cheap, but HRL is highly profitable. 

The firm has an EBIT margin of 10.04%, and an EBITDA margin of 12.06%, which are near the top of a sector known for very slim margins.

Furthermore, the firm has a positive net income margin of 7.7%, and a gross profit margin of 17%, which is not as good as some other food companies like Kellogg (K), which has a gross profit margin of 32%, or McCormick & Company (MKC) at 37.7%

However, HRL is doing something those other two companies are not. And that’s growing revenues at a double-digit rate. HRL has grown revenues by 26.2% (YoY), while K is at 2.35%, and MKC is at 5.19%

Our Opinion – 7/10

It’s rare for a flight-to-safety stock to offer so much growth potential. But HRL is growing, and it offers shareholders a dividend. 

And although the stock is just 13% off its 52-week highs, we are cautiously optimistic.

The company is incredibly profitable with fantastic growth. Yet, the fact that it’s not down much year-to-date can be seen as relative strength or more room to fall.

Overall, we like the company on pullbacks scaled into over time.