BMO Shifts To Neutral Stance On Hormel, Cites Valuation, Trade Concerns

Hormel Foods Corp HRL has limited near-term upside, according to BMO Capital Markets.

The Analyst

Analyst Kenneth Zaslow downgraded Hormel Foods from Outperform to Market Perform and increased the price target from $38 to $44.

The Thesis

Hormel's outperformance and valuation expansion prompted the downgrade, rather than a shift in BMO's long-term view concerning the company or its underlying fundamentals, Zaslow said in the downgrade note. (See his track record here.) 

Hormel is likely to return to operating profit in 2019 thanks to improving turkey numbers, the analyst said. 

"Our case for aggressively investing in HRL is less persuasive at current valuations and trade uncertainties," Zaslow said. 

The stock has outperformed the S&P 500 by more than 1,700 basis points over the past 12 months, he said, adding that the valuation reflects a significant premium to the equity's historical average.

Relative to the packaged food peer group's 13 times multiple, Hormel shares trade at 15.8 times BMO's FY2019 EV/EBITDA estimates for the company. 

The premium to peers is justified due to Hormel's "strong execution, above-average portfolio growth and significant market shares in niche categories create a stronger growth profile with lower earnings variability than its peers," Zaslow said. 

BMO's 2019 estimates for Hormel are premised on 5-percent EBITDA growth, facilitated by a 20-percent-plus improvement in turkey, a mix shift in refrigerated goods, a 5-to-10-cent accretion from its recent acquisition, lower input costs, cost savings initiatives and strong pork cutout margins.

The Price Action

Hormel shares have gained about 18 percent year-to-date. The stock was down 1.58 percent at $41.24 at the time of publication Monday. 

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