Deutsche Stays Sidelined On Hormel Ahead Of Q3 Earnings

Deutsche Bank maintained its Hold rating on Hormel Foods Corp HRL as it remains cautious on the company's margin trajectory despite being positive on its core fundamentals.

Hormel reports its third quarter earnings on August 18. Deutsche expects EPS of $0.35 (in line with consensus) on 2.3 percent growth in sales to $2.24 billion (consensus: $2.26 billion).

"We expect investors to focus on Hormel's margin profile given elevated levels relative to management's long-term target ranges, particularly for Refrigerated Foods. We also expect a focus on Jennie-O as Hormel laps year-ago avian flu related challenges," analyst Mario Contreras wrote in a note.

The analyst sees solid third quarter growth in Refrigerated Food with sales rising 8.6 percent and operating profit growth of 22 percent. Contreras would look for feedback on how Applegate is performing versus expectations, as well as an update on distribution and supply chain.

Meanwhile, in Jennie-O, the analyst projects sales growth of 16 percent and operating profit improvement of 77 percent in the third quarter against an avian flu-challenged year-ago comparison.

Finally, Contreras would focus on any update on the recent bolt-on acquisition, Justin's LLC.

"Although favorable pork costs are likely a near-term benefit, this will likely moderate as the hog price/cutout spread normalizes. We see limited upside based on current valuation (23x C2016 P/E) and reiterate our HOLD opinion," Contreras added.

At time of writing, shares of Hormel Foods fell 1.13 percent to $36.64. Contreras has a price target of $38.