While Wall Street has been quick to punish every penny of shortfall this earnings season, Hormel somehow gained 1.4% after missing the mark by a full 3 cents a share. What makes this unassuming food stock so bulletproof? According to management, the secret boils down to spam.
Hormel reported a fairly wide miss for its third fiscal quarter on Thursday morning: 42 cents a share where the analysts were expecting at least 45 cents. Guidance for the remainder of the year aims a little below consensus and could end up missing the mark by 6 cents a share.
For a stock already priced at 23 times trailing earnings and without much in the way of immediate growth forecasts, even a revenue print a touch above consensus ordinarily wouldn’t win a lot of applause. Organic domestic growth would be tricky to generate in any event, since U.S. consumers are already buying as much bacon and pork as we care to eat.
According to some, as a nation we’re already devouring too much.
But while domestic refrigerated meat sales are up a scant 2.4%, international sales soared 31% and profitability on that side of the business is rising even faster. This is still a relatively small slice of HRL’s overall operation at 9.3% of EBIT, but it provides the spice that makes an otherwise back-to-basics quarter not only palatable to investors but even, evidently, something to tempt earnings-dulled tastes. Because, as it turns out, Spam -- Hormel’s best-selling proprietary canned pork product -- is doing big business overseas. Spam is a delicacy in countries like China, a staple in Korea and the Philippines and practically the national dish of Guam. As these countries put more meat on their tables, Spam represents an exotic import with a long shelf life and fewer jokes to hold back consumption.
Hormel has singled out Spam sales as a key ingredient in every aspect of the international business’s success for several quarters now: solid margin gains, export volume growth and increased visibility in China in particular. While this does not necessarily make Hormel an “emerging markets food stock” like Yum! Brands, this 9% of the company is evidently the driver of much of what excites the market and keeps these shares flying at a P/E roughly comparable to what YUM demands from China consumer bulls.
Spam was created in 1937. There's much speculation as to the origin of the Spam name. The company's website doesn't provide the historical origin but rumors continue to swirl about its meaning. Some say that it is an acronym: "Specially Processed American Meat". Others have said that it stands for "Shoulders of Pork and HAm". According to Hormel's official Spam website, the actual origin is "only known only by a small circle of former Hormel executives and probably Nostradamus".
Despite the apparent rich valuation of Hormel, meat packing companies are in play as both consolidators and takeout targets in their own right, so the P/E doesn’t look too rich by peer standards – look at Tyson, Hilshire Brands or Smithfield’s final pre-acquisition numbers for proof of that. Hormel itself has opened up $2 billion in credit lines to fund opportunistic M&A and bolt on any growth it needs. Analysts are banking on a big deal or two in the next 12 months to boost earnings 15%, and after that, the growth could keep coming.
