Hormel Foods (NYSE:HRL), maker of Dinty Moore Beef Stew and Jennie-O turkey products, just posted better-than-expected earnings. But will it make a hearty meal for your investment portfolio?
If its third-quarter 2011 results, reported Thursday, are any indication, the answer is yes. After all, Hormel net income for the period was up 15% thanks to solid sales of its grocery items and Jennie-O turkey products, as well as good overseas revenues.
And Hormel beat expectations and raised guidance — a generally good formula for boosting stock prices. Hormel earned $98.5 million, or 36 cents per share — that was two cents a share better than analysts expected. Its 10% revenue rise to $1.91 billion beat expectations by $40 million. And Hormel raised its full-year earnings forecast by a few pennies from $1.67 to $1.73 per share to $1.70 to $1.75.
But one good quarter does not necessarily mean you can make money investing in Hormel stock. Here are three other reasons such an investment might be good:
- Good quarterly earnings. Hormel has been able to meet or surpass analysts’ expectations in six of its past six earnings reports.
- Hormel is out-earning its cost of capital. Hormel is earning more than its cost of capital — and it’s progressing. How so? It produced positive EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, Hormel’s EVA momentum was 2%, based on first six months’ annualized 2010 revenue of $6.9 billion, and EVA that rose from $158 million in the first six months’ annualized 2010 to $265 million in in the first six months’ annualized 2011, using an 8% weighted average cost of capital.
- Increasing sales and profits and healthy balance sheet. Hormel has been increasing sales and profits. Its $7.2 billion in revenues has risen at an average rate of 5.6% during the past five years while its net income of $396 million has increased at a 8.5% annual rate — yielding a slim 6% net profit margin. It has no debt, and its cash has climbed at a 31.7% annual rate, from $172 million (2006) to $518 million (2010).
One reason to hesitate:
- It’s a very expensive stock. Hormel’s price/earnings-to-growth ratio of 3.61 (where a PEG of 1.0 is considered fairly priced) means it is very expensive. It currently has a P/E of 16.6 and is expected to grow earnings 4.6% to $1.80 in fiscal 2012.
Unless the forecast for 2012 earnings is way too low, Hormel’s stock price is way too high. I would wait until the price comes down or the earnings forecast goes up before investing.
Peter Cohan has no financial interest in the securities mentioned.