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Stock Strategist

Hormel's Outlook Disappoints

Record turkey and pork prices may not last forever.

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 Hormel Foods (HRL) reported a solid fourth quarter, and we expect to modestly increase our $41 fair value estimate, largely as a result of the time value of money. Management expects to exceed its long-term goals of 5% sales and 10% earnings growth in fiscal 2015, but it disappointed investors with forecast earnings of $2.45-$2.55 per share, roughly in line with our forecasts. Echoing our concerns, management cautioned investors that record turkey and pork commodity prices may ease.

We have assigned Hormel a narrow Morningstar Economic Moat Rating and are positive on its long-term prospects, but believe the valuation is stretched. We are impressed by Hormel's success in the value-added turkey market and expect it will benefit from long-term secular growth as consumers look for healthier options, but the recent performance (with Jennie-O Turkey sales up 11% and margins up 440 basis points to 18.7%) could also be partially attributed to near-term factors that may prove to be fleeting, with low grain costs and supply still catching up. Additionally, while management deserves praise for its strong capital-allocation record, we think it will be difficult to identify accretive external opportunities, given the elevated multiples of consumer packaged goods firms.

Liang Feng does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.