Dive Brief:
- Credit Suisse upgraded its rating on Hormel to "outperform" and increased its target price to $43 per share, over the previous target of $38.
- Driving Credit Suisse's opinion of Hormel were "strong benefits of deflationary trends in meat and corn, near-term catalyst to improve investor perception, a clear path to volume growth, balance sheet optionality, and the possibility that short-sellers of the stock may eventually become fatigued," Food Business News reported.
- Hormel's potential for profitability stems not only from volume growth but from the potential for lower commodity costs for hogs, corn and turkey breasts and avoiding supply gluts in value-added categories.
Dive Insight:
The rating change shouldn't come as a surprise following Hormel's earnings report last week. That report included record sales after 5% growth, a 33% leap in net earnings to achieve 13 straight quarters of record earnings and the third time this year that the company raised its full-year profit outlook. Three of Hormel's five segments posted growth in volume, sales and earnings in the quarter.
That kind of growth is positive for shareholders to see, but Credit Suisse centered part of its argument for Hormel's growth potential around the profitable combination of value-added products and low input costs. Dairy companies like Dean Foods have ridden favorable milk costs to higher profitability, but the company hasn't achieved the top line growth to complement those commodity costs.
Value-added products are becoming more common in segments like produce and meat. Hormel has a firm handle on value-added meats and other niche products like Justin's nut butters, which have "stickier" pricing and carry a premium perception. This positioning separates Hormel's growth projections from those of many other major competitors in grocery, which have turned to cost-cutting as sales stagnate or decline.