Hormel Foods Corp (HRL:NYQ) Analysis

The company Hormel Foods Corporation is an American food company based in southeastern Minnesota in the United States. It is known for its mass products and especially its brand of pre-cooked meat marketed since 1926. The company was founded by George A. Hormel in 1891 under the name George A. Hormel & Company in Minnesota. It was not until 1993 that it took the name Hormel Foods Corporation. It markets products under different brands including Chi-Chi's, Dinty Moore, Farmer John, Jennie-O, Lloyd's, Spam, Stagg and Hormel. It has 20,000 employees worldwide. 81% of American households have a Hormel product in their home.

Hormel currently trades at 21.4 times recurring earnings, 10.1 times tangible book value, 2 times sales, and 23 times free cash flow. That's pretty expensive, though relative to the rest of the US market it's still OK, especially since we're dealing with an aristocrat... This company has actually increased its dividend for a whopping 51 consecutive years.

The yield is not exceptional, with only 1.9%, but it is explained by a distribution ratio of 41% compared to earnings and 44% compared to free cash flow. This means that Hormel still has a good margin to continue increasing its dividend in the future, even in the event of a hard blow. The American company is therefore not ready to lose its crown. In addition, over the last five years, Hormel has increased its distributions at a sustained annual rate of 16.9%.

Just like the dividend, profits, cash reserves and asset values are growing over the long term, which proves the solidity of the American giant's business model. The company manages to create value for its owners over the long term, and this is reflected in the share price, which has more than tripled over the last ten years (while the S&P 500 has only doubled). If we go back further, we can even see that HRL has gained more than 2,000% over the last thirty years (compared to 1,000% for the S&P).

Cash reserves are sufficient, without being extraordinary, with a general liquidity ratio of 1.9 (very slightly down) and a reduced liquidity ratio of 1.05. The gross margin is also slightly down, at 21,86%, for a net margin of 9,24%. Also down, the return on assets, at 12,14%, for an appreciable return on equity of 18%.

The long-term debt-to-asset ratio is down to 3.58%. With the abundant free cash flow it generates, Hormel would theoretically be able to wipe its entire slate clean in less than four months! This gives an idea of the solidity of this company. Despite low debt, the food company has not needed to finance its expansion through other means, such as a capital increase. The number of shares outstanding has in fact been stable for several years, thus avoiding any dilution of shareholders' equity.

Hormel, with its history spanning three centuries, operates in a very defensive sector, which translates into a low beta (0.47). It has a diversified portfolio of brands, well established in the US, as well as in other countries. It is therefore difficult for new competitors to attack this behemoth. The risks of technological obsolescence are also relatively low. HRL is the kind of stock that you can buy and forget about in a corner.

That being said, as mentioned at the beginning of the article, the stock is trading at a fairly high price. This is clearly not a buying opportunity at the moment. However, despite its price, given the quality and history of the company, I believe that it is still a stock to hold.