Credit Suisse Upgrades Hormel Foods To Outperform

"In an environment where packaged food peers are rationalizing their portfolios and turning almost exclusively to cost-cutting to adjust to slowing consumer demand, Hormel stands out as having a clear path toward volume growth over the next 12 months," analyst Robert Moskow wrote in a note.

As such, the analyst said the stock has plenty of room for more positive ratings revisions, saying that the company is a strong beneficiary of deflationary trends in meat and corn. Despite lower input costs, the company has not shown any material signs of pricing weakness or supply gluts in its value-added categories.

In addition, the company continues to shift its mix to premium value-added niche products with "stickier" pricing such as pre-cooked bacon and ribs, pepperoni snacks and Party Trays.

"While we agree that the company is still vulnerable to perhaps as much as 150 bps of margin contraction ($0.18/share) if pork packing capacity accelerates too fast or if corn prices skyrocket, we don't see either of these scenarios playing out in the next 12 months," Moskow continued.

Further, the company said in the fourth quarter it will establish a three–five-year consolidated operating margin target for the business rather than continue to provide "normalized" margin ranges.

"In our view, this will help frame the company's balanced portfolio more like that of a stable packaged foods company and less like a 'ticking time bomb' operating too high above its 'normalized" range,'" Moskow noted.

Moreover, amid continued volume growth and positive top-line trends, the analyst expects market skepticism about management's 5 percent sales and 10 percent EPS long-term growth goals to dissipate and consensus estimates for fiscal 2017 and 2018 to move higher.

On the acquisition front, the analyst said it remains unclear whether the company will use its balance sheet to finance a value-creating acquisition.

"We don't know if Hormel would ever consider AdvancePierre Foods Holdings Inc APFH in that regard, but a deal of that size (assuming an 18 percent premium) would provide EPS accretion of $0.25 even before synergies," Moskow added.

At the time of writing, shares of Hormel Foods rose 3.13 percent to $39.87. The analyst has raised his price target to $43 from $38.

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