Hormel: Time to Feast on the Dip as Yield Gets Tastier

September 10, 2024 at 08:45 AM EDT

Photo of many cans of SPAM, a classic Hormal brand. Hormel Foods Co. (NYSE: HRL) is a global branded food company in the consumer staples sector. Its shelf-stable, refrigerated meat and poultry food products are stocked across supermarkets, convenience stores, retailers, commercial kitchens, and food service provider pantries. Despite cutting the full-year 2024 guidance on sinking commodity prices, investors aggressively scooped up the gap-down shares.

SPAM Put Hormel on the Map

SPAM is one of those iconic canned food products that has been and still is consumed around the world by billions of consumers. Ever since its launch in 1937 as a non-perishable, compact, cheap, and tasty source of nourishment for soldiers during World War II, SPAM has been ever-present in our culture. It's even earned the moniker of being unwanted commercial junk e-mail in the information age.

Hormel was founded in 1891 and spent many years as an obscure pork producer until SPAM put it on the map. SPAM continues to enjoy a resurgence, posting its second straight quarter of year-over-year (YoY) double-digit international revenue growth, driving 78% YoY international profits.

Hormel’s Portfolio of Brands

Hormel has expanded its portfolio to accommodate a broader changing audience of consumers, including Applegate Natural & Organic Meats, Dinty Moore, Jennie-O, Austin Blue's Smoked Meats, Lloyd's Barbecue Co., Columbus Craft Meats, Sadler's Smokehouse, Hormel Black Label Bacon, Hormel Canned Meats, Hormel Chili, and SPAM. It also owns Planter's, Skippy Corn Nuts, and Chi-Chi's brands. Hormel's Pepperoni is the leading brand of retail pepperoni.

Recent Branded Innovation

Hormel has been innovating its products, which has helped drive growth. Hormel Golden Salted Egg Yolk Snackable Sausage, Wholly Guacamole Extra Chunky Restaurant Style, House of Tsang General Tso's Chicken, Beef Teriyaki, and Spicy Ginger Chicken are some of its latest creations. SPAM Korean Barbecue and Hormel Flash 180 Sous Vide Chicken Breast were a hit. Applegate's Organic Uncured Turkey Pepperoni and Port & Beef Pepperoni cater to carnivores and keto dieters looking for healthier low-carb snacks.

Factory Disruptions and Turkey Prices Impact

In its fiscal third-quarter earnings report, Hormel reported adjusted earnings of 37 cents per share to beat analyst estimates by a penny.

Revenues fell 2.2% YoY to $2.9 billion, missing consensus estimates of $2.95 billion. Bird commodity prices took a toll on sales as nearly 66% of its 2.2% YoY revenue drop stemmed from the lower prices of turkeys created from lower demand. Factory production disruptions impacted the quarter but will likely recover by fiscal Q4. However, it negatively impacted full-year 2024 guidance.

On the bright side, its international business sales showed a 78% YoY jump in profits despite a 13% drop in volume and a 2% drop in net sales. Its strongest brands included SPAM, Skippy, Jennie-O, and Applegate.

Foodservice saw volume rise 2% as net sales rose 7% YoY while segment profits dipped 3% YoY. This marks the fifth straight quarter of YoY volume growth for Foodservice.

Hormel Narrows and Lowers Full Year 2024 Guidance

Hormel Foods issued fiscal full-year 2024 EPS guidance of $1.57 to $1.63, which was narrowed from previous guidance of $1.55 to $1.65 versus $1.60 consensus estimates. Full-year 2024 revenue is expected between $11.8 billion and $12.1 billion, lowered from the previous estimate of $12.2 billion to $12.5 billion versus $12.14 billion consensus estimates. The full year expense of 2025 is expected to be around $250 million.

Hormel CEO Jim Snee commented on the production disruption. “As production continues to ramp up, we have secured co-packer partnerships to help support our snack nuts portfolio to improve fill rates while we finish upgrades within the Suffolk plant. By the end of this fiscal year, we believe the production disruption will be largely resolved, and we will be in a much better position to return the business to full-service levels.”

Hormel competes for ever-tightening consumer dollars with major food producers, including Tyson Foods Inc. (NYSE: TSN), Conagra Brands Inc. (NYSE: CAG) and Campbell Soup Co. (NASDAQ: CPB).

HRL Stock Slingshots Back Up to the Ascending Triangle Pattern

An ascending triangle forms when a flat-top resistance upper trendline converges with an ascending lower trendline at the apex point. This represents the immovable object, which is the flat-top resistance price level and the unstoppable force, which is represented by rising bids.

Chart illustrating how HRL Stock Slingshots Back Up to the Ascending Triangle Pattern

HRL initially gapped down to a low of $29.21 on its earnings release. However, shares managed to slingshot back up through the $31.12 lower gap fill surge through the upper gap fill at $32.33 and retest the ascending trendline. This quick reversal bounce indicates motivated buyers were ready to scoop up shares. The daily relative strength index (RSI) has bounced to the 53-band. Fibonacci (Fib) pullback support levels are at $7.31, $6.86, $6.59, and $6.29.

Hormel’s average consensus price target is $32.33, and its highest analyst price target sits at $37.00.

Actionable Options Strategies

Bullish investors can buy the dip using cash-secured puts at the fib pullback support levels. Upon getting assigned shares, covered calls can be written at fib targets to execute a wheel strategy to collect premium income in addition to the 3.47% annual dividend yield.

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