May 26, 2011

 

Hormel to expect declination in pork margins 

 

 

Due to the increase in hogs and turkeys' feed, Hormel Foods Corp. (HRL) foresees its margins for pork and turkey processing operations to decrease from high levels.

 

The company is also struggling to raise prices fast enough to keep up with cost inflation.

 

The cautious projection sent shares down 7.4% to US$27.81 in recent trading, even after Hormel posted 41% growth in second-quarter earnings and raised its earnings outlook for the year.

 

Hormel has enjoyed strong margins from processing the two meats lately, buoyed by strong demand and locking in favourable costs for feed. However, hog costs are expected to increase with the warmer weather and feed costs will rise too as the favourable contracts end, making the second-half of its current year more challenging, Hormel Chief Executive Jeffery Ettinger said on Wednesday (May 25).

 

Hormel's margins have been a bright spot for the company, helping the company post 10 straight quarters of earnings beats, but they have slipped lately. In refrigerated foods, which process pork, operating margins were 6.8%, down from 9.5% last quarter, while margins for Jennie-O turkey fell to 12.7% from 20.2% last quarter.

 

The decline was more than expected, an analyst said, taking the steam out of Hormel shares.

 

"The stock's premium is going to get much more difficult to defend if this margin trend continues," the analyst added.

 

Hormel is also raising prices and improving productivity for some of its other product lines, including canned products like Spam, to offset the higher costs, but Ettinger said the company expects lag effect before the higher prices can catch up to the cost increases.

 

Food companies have been grappling with a number of higher costs, from grains to fuel, and have been passing the costs along to consumers. Hormel said sales volumes have held up well despite the higher prices, largely because prices are increasing throughout the grocery store.

 

"It has been better than traditional elasticity would suggest," Ettinger said.

 

For the quarter ended May 1, Hormel reported a profit of US$109.6 million, or US$0.40 a share, up from US$77.9 million, or US$0.29 a share, a year earlier. The prior year included US$0.05 in charges related to a plant closing and costs associated with the US health-care overhaul.

 

Revenue increased 15% to US$1.96 billion as volume grew 7%.

 

Analysts polled by Thomson Reuters most recently forecast earnings of US$0.40 on revenue of US$1.82 billion.

 

For the full-year, Hormel raised its earnings outlook by US$0.05 to a range of US$1.67-1.73.

 

Gross margin edged up to 16.7% from 16.5%.