Hormel Foods has been treading water for the past six months, recording a small loss of 3.5% while holding steady at $20.95. The stock also fell short of the S&P 500’s 7.1% gain during that period.
Is now the time to buy Hormel Foods, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Hormel Foods Will Underperform?
We don't have much confidence in Hormel Foods. Here are three reasons there are better opportunities than HRL and a stock we'd rather own.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
Hormel Foods’s average quarterly sales volumes have shrunk by 3.4% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable. 
2. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
Hormel Foods has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 16.2% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $83.84 went towards paying for raw materials, production of goods, transportation, and distribution.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Hormel Foods, its EPS declined by 8.8% annually over the last three years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
Final Judgment
We see the value of companies helping consumers, but in the case of Hormel Foods, we’re out. With its shares underperforming the market lately, the stock trades at 13.7× forward P/E (or $20.95 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.
Stocks We Would Buy Instead of Hormel Foods
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