Hormel Foods Corp (NYSE:HRL) released its 2nd quarter 2015 results this morning. The company reported earnings-per-share of $0.67 per share for the quarter. Earnings-per-share rose 29% from $0.52 per share in the same quarter a year ago. The market has responded favorably, pushing the company’s share price up over 4% at the time of this writing.

Hormel’s Growth Explored

Hormel is not a new company and has no business growing earnings-per-share 29%. Hormel is a Dividend Aristocrat. The company was founded in 1891.

Revenue growth was not the driver of rapid earnings-per-share growth. The company’s sales growth by segment versus the same quarter a year ago is shown below:

  • Refrigerated Foods: Sales down 8%
  • Jennie-O Turkey: Sales up 15%
  • Grocery Products: Sales up 1%
  • Specialty Foods: Sales up 32%
  • International & Other: Sales down 7%

The rapid growth in the Specialty Foods segment is due to the company’s acquisition of CytoSport – makers of MuscleMilk. The Jennie-O Turkey segment did show excellent sales growth, but the Refrigerated Foods segment and International & Other segments showed declining sales. In total, Hormel realized sales growth of 2% versus the same quarter a year ago. This is not the type of sales growth that normally accompanies a 29% jump in earnings-per-share.

Compare the company’s sales growth by segment with profit growth by segment (shown below):

  • Refrigerated Foods: Profit up 52%
  • Jennie-O Turkey: Profit up 41%
  • Grocery Products: Profit up 1%
  • Specialty Foods: Profit up 11%
  • International & Other: Profit up 2%

Every segment posted increased profit. The Refrigerated Foods and Jennie-O Turkey segment showed rapid growth. These two segments were responsible for the 29% jump in earnings-per-share.

Refrigerated Foods

According to Hormel’s 2nd quarter 2015 press release, results in the Refrigerated Foods segment “were driven by lower input costs along with strong sales growth of value added items (emphasis added)”.

Lower input costs and “strong sales growth of value added items” drove earnings growth in the segment. While value-added items certainly have a higher profit margin than commodity items, the company could not have seen tremendous growth in this category as segment sales declined 8%.

This leaves lower input costs as the primary reason for rapid earnings-per-share growth in the Refrigerated Foods segment. Grain prices are down virtually across the board. This reduces the cost of raising livestock. At the same time, the cost of meat has increased. This is a ‘best case scenario’ for Hormel. Hormel shareholders should enjoy the current gains. If trends reverse – that is to say grain prices rise and meat prices fall – Hormel will likely see earnings-per-share fall. The company does exhibit long-term growth, but will not grow earnings-per-share near30% for very long.

Jennie-O Turkey

The Jennie-O Turkey segment generated from the same grain and meat trends that the Refrigerated Foods segment did. On the upside, the segment also realized 15% sales growth. The shift toward foods perceived to be healthier is driving Turkey sales. Jennie-O lean ground turkey and Jennie-O rotisserie turkey were the two best performers in the segment.

On the downside, avian influenza will hamper Jennie-O Turkey sales for at least the next quarter. Hormel recently laid off 233 employees at their Faribault, Minnesota plant. The avian influenza outbreak has reduced the number of turkeys in stock, thus reducing the need for a full-force staff.

Hormel is working with the appropriate government agencies and taking reasonable steps to contain the avian influenza outbreak. The company will see earnings-per-share affected in its 3rd and likely 4th quarters this year.


The negative impact from the avian influenza outbreak is offsetting Hormel’s good fortune with rising meat prices and falling grain prices. The company is still expecting to hit earnings-per-share of $2.50 to $2.60 this year, despite outperformance in the second quarter of fiscal 2015. In total, the company is expecting earnings-per-share growth of between 12.1% and 16.6% versus the same quarter a year ago.

Final Thoughts

Hormel is benefiting from lower input costs – something that is completely out of the company’s control. On the other hand, avian influenza will offset some of these gains in the coming quarters. Hormel has grown revenue-per-share at 6.8% a year over the last decade.

Over the long-run, the company will likely see earnings-per-share growth of between 7% and 9% a share. Earnings-share-growth will come from revenue growth and margin improvements.

Hormel is currently trading at a price-to-earnings ratio of 24.3. The company appears to be somewhat overvalued at this time based on its elevated price-to-earnings ratio. Hormel’s solid growth prospects and decent dividend yield of 1.8% are offset by its relatively high price-to-earnings ratio. As a result, the company does not rank particularly high using The 8 Rules of Dividend Investing.