The War of the Food Giants
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Time and again people ask on forums about less risky investments, offering lower but dependable returns. After reading such posts I find myself admiring the food processing industry for its stable returns. Whenever raw material prices increase, these companies can raise their prices without any hassle, and since consumption of their products is more of a necessity than a choice, consumers don’t mind paying the hike in prices. As some health experts might advise us to stay away from processed foods, I on the contrary believe that one should stay close to this industry, but only when it comes to picking stocks. There’s nothing wrong in capitalizing on the habits of the mass public, so here are a few reasons why one should be a long term opportunist.
The industry
Consuming processed food items not only saves time, but also saves the hassle of cooking a meal. This mentality is slowly becoming the order of the day around the world. As the population increases around the globe, the demand for food will increase as well, and with the falling demand for home cooked meals, the processed food industry, just like in the past, will benefit slowly and steadily. The food that was once referred to as convenience food has entered the daily food chain of most people. Developing nations are slowly catching up on the industry, including India, which has the second largest population in the world. The growth prospects of the industry are endless, making this industry very attractive for long term investors.
The company
Hormel Foods Corporation (NYSE: HRL) is an international leading manufacturer and marketer of processed foods. Its production offers different types of meat products, sauces, chips, salad dressings, desserts, and drink mixes. Additionally the company also produces sugar and sugar substitutes, nutritional products, creamers, salt and pepper products along with industrial gelatin products. We can see that Hormel produces items that are required by everyone, on a daily basis.
In the industry where only favorite brands survive, it comes down to how the company kills its competition, and innovates to retain existing customers and lure new customers. It becomes a managerial battle, and Hormel has spared no efforts to be at the top. The company has been actively involved in its strategic brand building and marketing schemes to improve market share, to position itself above from its peers.
The numbers game
The company faces competition from ConAgra Foods (NYSE: CAG), Tyson Food (NYSE: TSN) and Kraft (NASDAQ: KRFT). From the comparison chart below its easy to deduce that Hormel Foods has been consistently beating its competitors in terms of stock returns, since the past 5 years or even 10 years, making our company clearly the best investment option in the food processing industry.
Hormel recently posted its quarterly results, stating the quarterly sales to be $2.01 billion, up 5.6% compared to the same quarter last year. The company’s earnings rose to $111.5 million this quarter compared to $98.5 million in Q3FY2011. Volume boost this quarter stood at 4% and both the profitability and revenues rose for 4 quarters in a row. The company was able to post profitable quarterly results despite the drought shooting up the prices of raw food items this quarter. The management expects similar performance in the fourth quarter, which could very well continue the robust performance of the stock.
Some fundamentals
The stock yields 2.08% paying out 31.4% of its profits. The net profit margin stands at about 6%, and gross profit margin standing at 16.12%. The company trades at 16x P/E and 1.55x PEG which does not make it an undervalued value pick, but a growth stock with a decent dividend. The company has a market cap of $7.58 billion and the expected EPS for the next 5 years stands at 10.33%.
Conclusion
Processed food items are an everyday requirement for most people in the developed nations, and the demand is catching up fast in developing nations like India and Brazil. The demand for processed food items will only increase over time, and so will the revenues of processed food suppliers. The industry is growing steadily, and Hormel looks well positioned to take advantage of the growth prospects.
Also, Hormel has been profitable in a very difficult quarter. The prices of raw food materials have gone up significantly, and yet the company posted good results. This indicates the agility of the management and also tells us why the company has been a winner for the past 10 years and is likely to continue growing. The stock is sealed with a Foolish buy rating for all the compelling reasons mentioned above.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
