Hormel Earnings: New Challenges Emerge, but Shares Already Price in Recovery

Hormel’s third quarter revealed new weaknesses that plagued performance, with sales surprisingly declining 2.3%. Previous full-year sales guidance implied a sales acceleration for the second half. On the positive side, the adjusted operating margin, which excludes a $70 million payment from arbitration, remained steady at about 9.7%, compared with 9.6% a year ago. We expect to reduce our fair value estimate of $38 per share by a dollar or so for narrow-moat Hormel on weaker near-term performance. We continue to forecast a return to low-single-digit annual sales growth and operating margins to return to 13% over the next five years. So, with shares trading near our fair value estimate, we think the market is already pricing in recovery and see limited risk-adjusted upside.