Plant Closes for Hormel Foods - Analyst Blog

 
Hormel Foods Corporation (HRL) has announced the closure of its Turlock, California plant by October 29, 2010. The plant produces VALLEY FRESH canned meats. The closure is expected to costs 5 cents per share, which will be included in the second quarter of fiscal 2010 EPS.

The above closure was made with the intention to relocate the plant for better purchasing and distribution efficiencies. This would help decrease operating costs to a great extent.

Hormel plans to increase its advertising spending in fiscal 2010, which will increase its operating expense. Yet, in conjunction with enhanced promotional efforts, the company should be able to maintain and grow its market share. We are confident about Hormel being able to restore top-line growth on an annualized basis in fiscal 2010, over and above the revenue gains that are expected in future.

Hormel has also strengthened its position through acquisitions, which are expected to be its key growth strategy. Given the company’s strong balance sheet and management’s track record of successful acquisition and integration of businesses over the years, we expect acquisitions to play a key role in the company’s growth going forward.

The company has the financial flexibility to pursue acquisitions, with its current debt-to-capitalization ratio of 14%.

However, based on intense competition in the food market and integration risks emanating from acquisitions, we maintain our Neutral recommendation on the stock.