March 11, 2010

US analyst initiates credit coverage of Hormel Foods

US stock analyst Morningstar has initiated credit coverage of Hormel Foods with a rating of AA, reflecting Hormel's conservative approach to its capital structure, narrow economic moat, and strong cash flow generation capabilities.

Financially, Morningstar noted Hormel's strong debt-to-capital ratio at 18%, its cash flow average at 5% of sales, its projected ease in servicing US$350 million in debt and its operating margins expected to stay in the 8-8.5% range.

Competitively, the agency said while Hormel is exposed to commodity cost volatility as a meat company, it has successfully positioned itself as a branded consumer product company.

It added that by owning top brands in niche categories, such as shelf-stable packaged meats (Spam) and chili (Hormel), Hormel is uniquely positioned relative to other meat companies, in particular Tyson Foods and Smithfield Foods, which rely more on fresh products where brand means little. At the end of fiscal 2009, Hormel held 34 branded products that had the No. 1 or No. 2 positions in their categories.

However, Hormel has remained profitable through many ups and downs, Morningstar said. The agency also expects Hormel Foods to retain its competitive advantages and impressive returns on invested capital over the foreseeable future.