Two important questions to ask before you buy Hormel Foods Corporation (NYSE:HRL) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, Hormel Foods is currently valued at US$22b. I’ve analysed below, the health and outlook of Hormel Foods’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
Is Hormel Foods generating enough cash?
Free cash flow (FCF) is the amount of cash Hormel Foods has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
There are two methods I will use to evaluate the quality of Hormel Foods’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Hormel Foods’s yield of 3.71% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Hormel Foods but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Hormel Foods?Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at Hormel Foods’s expected operating cash flows. In the next couple of years, Hormel Foods’s operating cash flows is expected to grow by a double-digit 20%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Hormel Foods’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year||+3 year|
|Operating Cash Flow (OCF)||US$1.1b||US$1.2b||US$1.2b||US$1.3b|
|OCF Growth Year-On-Year||3.5%||5.8%||9.4%|
|OCF Growth From Current Year||9.6%||20%|
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Hormel Foods as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, I recommend you continue to research Hormel Foods to get a better picture of the company by looking at:
- Valuation: What is HRL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HRL is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Hormel Foods’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.