Hormel: A Thanksgiving Buy
11/23/2017 5:01 am EST
We wish all our readers the very best for the Thanksgiving holiday—an appropriate time to share a buy recommendation from Ben Reynolds for a favorite food stock and turkey purveyor. Here's the latest from his Sure Dividend advisory.
The stock market isn’t giving us much to be thankful for., with the S&P 500 is trading for a price-to-earnings ratio of 25.6, versus its historical average of 15.7. There are few quality businesses trading at fair prices.
One exception is Hormel Foods (HRL); owner of Jennie-O Turkey, Applegate Organics, Muscle Milk, Skippy, and many other food brands.
Hormel is a member of the exclusive Dividend Kings list; a select group of stocks with 50+ years of rising dividends. Hormel has increased its dividends for 51 consecutive years. This shows the company has a strong and durable competitive advantage in the food industry.
Hormel’s competitive advantage comes from its portfolio of well-known food brands. The company owns over 35 brands that are either first or second in their category. Hormel supports its brands with large advertising expenditures. The company spent over $200 million on advertising in fiscal 2016.
Hormel’s growth days are not over. Bolt-on acquisitions are a likely growth catalyst. Hormel has grown through intelligent acquisitions over the last several years, including Applegate Organics, Justin’s Peanut Butter, and Muscle Milk.
Earnings-per-share will also benefit from margin improvements from cost reductions and greater economies of scale. Hormel boosted its net profit margin from 4.7% in 2007 to 9.0% in 2016.
There’s much to like about Hormel – and this usually means an overvalued price in today’s market. That’s not the case at Hormel. The company is currently going through temporary struggles due to low turkey prices. Hormel owns the turkey farms that produce Jennie-O Turkey.
When turkey prices fall, Hormel’s margins decline, resulting in lower earnings. There is currently an oversupply of Turkey. When the situation reverses, Hormel’s earnings will rebound.
This temporary decline has created a compelling entry point for long-term investors. The stock is currently trading for a price-to-earnings ratio of 20.4.
A price-to-earnings ratio of around 20 is fair value for a high-quality business with solid long-term growth prospects. Hormel is perhaps the perfect example of a great business trading at a fair price; a rarity in today’s overvalued market.