Hormel HRL shares were down in early trading after the company lowered (and tightened) its earnings guidance range to $1.88-$1.96 per share from $1.93-$2.03, representing a 3% decline at the midpoint. Management cited lower-than-expected results in its pork operations, higher input costs, and softer retail sales of refrigerated food products. Supporting commentary was limited; management said it will present more details regarding its 2013 outlook during the June 26 investor day, which we will attend.
Analysts don’t expect a material change to the $35 fair value estimate, as the time value of money offsets the lower guidance; even if Hormel generates $1.88 per share in fiscal 2013–the low end of the revised guidance range–we’ll hold the line on the fair value estimate. Despite its recent pullback, the stock has had a strong run since January (up more than 30%) and still trades at 20 times the midpoint of management’s revised earnings guidance and a 10% premium to our fair value estimate. Investors remain confident that Hormel’s solid brand portfolio will allow the firm to continue generating excess returns on capital over the long term (evidence for our narrow moat rating), but we believe the current valuation leaves little room for downside.
Although updated guidance is below our initial expectations, we’re not entirely surprised that elevated input costs have challenged results. In addition, we’ve expected refrigerated food segment volume to decline over the next few months as Hormel intentionally reduces the harvest levels of its hog processing operations to help offset elevated input costs. Based on the language in Hormel’s press release, we suspect the earnings revision stems largely from these factors having a greater impact on results than management previously anticipated, but we recognize other factors could also be at play. Initially, management spelled out a fairly optimistic view for refrigerated food segment sales in the back half of 2013, primarily because of the positive initial reception for its new Hormel REV snack wrap.
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