Why Hormel Foods Stock Is Rocketing Higher Today
Key Points
Hormel Foods grew organic sales and adjusted net income by 3% and 14% in the second quarter.
Management also reaffirmed full-year sales and adjusted earnings per share guidance.
Hormel remains reasonably valued, but interested investors need to monitor its dividend's health.
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Shares of Hormel Foods (NYSE: HRL) -- home to the Planters, Skippy, Jennie-O, and Spam brands -- are up 14% as of 2 p.m. ET on Thursday after the company reported excellent second-quarter earnings. The food behemoth beat analysts' expectations and reaffirmed its full-year sales and adjusted net income guidance, prompting the stock to rise. While 3% organic sales growth and a 14% rise in adjusted earnings per share (EPS) in Q2 may not be a big enough catalyst to move Hormel's share price much today, it is worth remembering the stock has been halved over the last five years.
Following this steady march lower, Hormel may be showing some promising signs of life with today's results. This was the sixth consecutive quarter of organic sales growth for the company. It was also the 11th straight quarter of organic sales growth for its foodservice unit. Furthermore, despite soaring fuel and logistics expenses and an uncertain consumer environment, Hormel's margins expanded nonetheless in Q2, as evidenced by its soaring adjusted EPS. Considering that management touts Hormel's long-term growth algorithm as 2% to 3% orgain sales growth and 5% to 7% operating income growth, Q2's results were excellent.
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Despite today's rise, Hormel still trades at 11 times earnings before interest, depreciation, taxes, and amortization (EBITDA) and 16 times forward earnings, so it doesn't need outrageous growth to justify its valuation. That said, interested investors -- especially those interested in Hormel's 5.6% dividend yield -- will need to monitor the company's net income and free cash flow (FCF) closely going forward. Net income and FCF over the last year were $489 million and $578 million, respectively. However, Hormel paid out over $638 million in dividends over the same time. The company has increased its dividend payments for 59 straight years, but may struggle to do so going forward, unless its profits continue to improve dramatically.
Hormel is a great steady-Eddie investment to consider at today's reasonable valuation, but don't expect market-stomping returns.
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Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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