Credit Suisse raises Hormel's rating

by Eric Schroeder
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 Hormel
Hormel continues to shift its mix to premium value-added niche products such as pre-cooked bacon and Party Trays. 
 

NEW YORK — Credit Suisse on Aug. 22 raised its rating on Hormel Corp. to “outperform” and its target price to $43 per share, up from $38.

Robert
Robert Moskow, analyst with Credit Suisse 

“In an environment where packaged food peers are rationalizing their portfolios and turning almost exclusively to cost-cutting to adjust to slowing consumer demand, Hormel stands out as having a clear path toward volume growth over the next 12 months,” Robert Moskow, an analyst with Credit Suisse, wrote in the report. “As a result, we view this stock as highly attractive on a relative basis compared to the food group with plenty of room for more positive ratings revisions.”

Moskow said the key elements driving its rating’s action are strong benefits of deflationary trends in meat and corn, near-term catalyst to improve investor perception, a clear path to volume growth, balance sheet optionality, and the possibility that short-sellers of the stock may eventually become fatigued.

“As the best-in-class value-added protein producer, Hormel stands to benefit from another year of depressed input costs for hogs (-26 percent vs 5-year average) corn (-33 percent vs 5-year average), and turkey breasts (-31 percent vs 5-year average),” Moskow said. “Despite these lower input costs, we have yet to see any material signs of pricing weakness or supply gluts in the company’s value-added categories. In addition, the company continues to shift its mix to premium value-added niche products with ‘stickier’ pricing such as pre-cooked bacon and ribs, pepperoni snacks, and Party Trays. By our reckoning, about 70 percent of the Refrigerated Foods division and 90 percent of Jennie-O Turkey consists of value-added products.”

 Hormel
Hormel has accelerated advertising support for brands like Jennie-O turkey, Applegate and Skippy. 
 

Regarding Hormel’s clear path to volume growth, Moskow said the company reached somewhat of a tipping point in its sales trends in the third quarter with volume growth in four of its five divisions. Credit Suisse now expects this pattern to continue over the next 12 months behind an acceleration in advertising support for brands like Jennie-O turkey, Applegate, Skippy, Muscle Milk and core Hormel as well as the continued growth of pre-cooked bacon and ribs in food service.

“As these top-line trends continue to improve, we expect market skepticism about management’s 5 percent sales and 10 percent eps long-term growth goals to dissipate and consensus estimates for fiscal 2017 and 2018 to move higher,” he said. 

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