Hormel Foods Corp (HRL:NYQ) Analysis

Hormel Foods is one of the famous Aristocrats, or the list of companies that have increased their dividend for at least 25 consecutive years. It is also the last survivor of these very special American stocks in my portfolio. I have been invested in this little gem for more than nine years, with a gain of more than 200%. I started to sell off my US positions in 2017 because they were overpriced. Hormel had also increased in value, but I still estimated in my analysis that it was a year ago that HRL's quality was worth the price. Since then, the stock has risen sharply again, taking 30% in just one year. So let's see if Hormel is still in good odor.

Valuation & dividend

If HRL has increased in value by almost a third in such a short time, the fundamentals would also have had to follow suit so that we still get value for our money. But food products are not like smartphones. They climb slowly but surely. So no miracle in terms of valuations, since Hormel is now trading at:

• 24.16 times current recurring earnings
• 28.61 times average recurring earnings
• 4.05 times book value
• 13.5 times tangible assets
• 2.38 times sales
• 26.62 times current free cash flow
• 29.55 times the average free cash flow

All this is still very expensive. EBIT and EBITDA represent only 5.25% of the enterprise value, which is quite meager and confirms the expensive ratios above.

The dividend is not huge either, with a yield of only 1.72%, although we can put this last figure into perspective a little given that the distributions only represent:

• 41.51% current recurring profits
• 49.16% average recurring profits
• 45.75% of current free cash flow
• 50.78% of average free cash flow

HRL therefore still has a little room to not only continue to pay its dividend, but above all to make it grow further in the future. It should also be noted that this is obviously an undeniable quality of this aristocrat. Distributions have increased at a sustained rate over the last five years (13,36% per year). Above all, the American giant has allowed itself the luxury of increasing its dividend every year for 52 years! This even makes it a "Dividend King". Frankly, there are worse!

Balance sheet & result

Just like the dividend, earnings, cash reserves and asset values are growing over the long term, which proves, if proof were needed, the strength of Hormel's business model. The company is clearly succeeding in creating value for its owners and this is reflected in the share price, which has almost doubled in just five years.

From a liquidity perspective, it's not too bad, with a current ratio of 1.8 (down), but a quick ratio of 0.95, explained by fairly large inventories. The gross margin, with 20.9%, remains correct, although down. The net margin, with 9.84% and the free cash flow margin are also quite interesting, with 9.84%, respectively 8.93%. Same story on the profitability side, with an ROA at 11.53% (down), an ROE at 16.76% and a CFROA of 15.25%. Not much to complain about.

Although the long-term debt ratio jumped to 7.68% of assets, total debt remains under control, since it could be wiped out in less than a single year using free cash flow. Debt is in fact only 0.11 times equity.

It should be noted, however, that the number of Hormel shares outstanding has increased somewhat over the past five years, which has slightly diluted its shareholders' holdings. Given the surge in the share price during the same period, one would imagine that the latter did not hold this against the company too much.

Conclusion

With a history spanning over 125 years, a growing dividend for over half a century, controlled debt, profitability and attractive margins, Hormel is certainly a very solid company and has many of the characteristics of a franchise. Goodwill is growing over the long term, while capital expenditures and overhead are fairly well controlled.

Even though the volatility is quite high (19.56%), the beta is very low, with only 0.17. This is certainly a quality in these times.

The Z-Score (Altman), with 8.1, places HRL in the green zone, which theoretically protects it from bankruptcy for a while. But we already suspected that. What is a little more disappointing is the F-Score (Piotroski), with only three out of nine possible points. This tends to indicate that the fundamentals of this American company are deteriorating, even though the price rather suggests the opposite. Let us recall that this indicator is often quite effective in predicting the future performance of a stock.

Valuation ratios also suggest that Hormel is trading at a price that is really too expensive, even if we take into account the undeniable quality of the stock.

So I have decided to part ways with HRL. I will of course not fail to return to it, as soon as the American markets are accessible again.