Flagship Brands SPAM And Planters Fuel Global Expansion And Boost Earnings Potential

Key Takeaways

• Transformation and modernization initiatives, focusing on efficiency, could significantly boost operating income and margins in the coming years.
  
• Emphasis on innovation, increased advertising, and international expansion underpins potential revenue growth and market penetration across key global markets.
  
• Increased costs and disruptions, particularly in the turkey and Planters segments, could pressure earnings and hinder revenue growth in fiscal 2025.

Catalysts

Develops, processes, and distributes various meat, nuts, and other food products to retail, foodservice, deli, and commercial customers in the United States and internationally.

• Hormel Foods is implementing a transform and modernize initiative, which generated $75 million in operating income benefit in its first year and is expected to deliver between $100 million and $150 million in additional benefits in 2025. This effort focuses on improving processes and efficiency, which could enhance net margins and operating income.
  
• The company is pushing for innovation and expanding its market presence, particularly with its flagship brands like Hormel Black Label, SPAM, and Planters. This strategic focus on innovation and market expansion is likely to drive revenue growth.
  
• Hormel plans significant increases in advertising expenditure in 2025, signaling strengthened brand support, which could positively impact revenue by driving sales growth of its key brands.
  
• The Foodservice segment showed strong performance with a 6% increase in net sales, which exceeded industry growth. Further expansion, including innovation in solution-based offerings, is expected to continue driving revenue and market penetration.
  
• Hormel is advancing international growth strategies, particularly with plans to drive brand expansion in markets such as the Philippines, Indonesia, and China, which could bolster the company’s global revenue and earnings growth.

Hormel Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hormel Foods's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 8.5% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $1.98) by about December 2027, up from $805.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.3x on those 2027 earnings, down from 21.9x today. This future PE is lower than the current PE for the US Food industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Hormel Foods Future Earnings Per Share Growth

Risks

• The fiscal 2025 outlook anticipates higher SG&A expenses, primarily due to employee-related costs and the T&M initiative, which could pressure net margins and limit earnings growth.
  
• The anticipated commercial disruptions and higher costs in Q1 2025, notably from Planters and turkey segments, could result in unfavorable earnings impacts, affecting overall revenue growth and earnings for the year.
  
• Turkey prices are expected to remain at lower levels throughout 2025, potentially leading to a flat or negative impact on earnings from the turkey business despite cost mitigations elsewhere.
  
• If innovative products fail to resonate with consumer trends or execution falls short, it could hinder expected organic sales growth, thereby impacting revenue projections.
  
• There are expectations of unfavorable earnings per share impact in fiscal 2025 due to the Suffolk production disruption and lower whole-bird turkey prices, which present risks to achieving the higher end of the earnings guidance.

Valuation

• The analysts have a consensus price target of $32.15 for Hormel Foods based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $37.0, and the most bearish reporting a price target of just $27.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $12.6 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 5.9%.
• Given the current share price of $32.15, the analyst's price target of $32.15 is 0.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.