Hormel Suffers From 'Protein Market Volatility'

Hormel Foods Corp (NYSE: HRL), a producer of meat and other food products, lost the support of at least Wall Street analyst after the company's second-quarter earnings report fell short of expectations. Credit Suisse's Robert Moskow downgraded Hormel's stock rating from Outperform to Neutral with a price target slashed from $39 to $33 and was also removed from the firm's "Focus List."

The protein market is experiencing increased levels of volatility which lowers the ability to forecast the company's earnings growth, Moskow commented in a research report. In fact, the analyst is now doubting the company's 15–19 percent margin target by fiscal 2020. Granted, some of the volatility represents "short-term noise," but a "good portion" of it, such as a collapse in the turkey market in which prices continue sitting near multi-year lows, will continue into fiscal 2018.

Another challenge Hormel will need to work through is the pork industry's 10 percent expansion in slaughter, the analyst added. This could result in a spike in hog future prices and hurt the company's margins across its value-added line.

Bottom line, the analyst is modeling a 1 percent decline in Hormel's operating profits in fiscal 2018 given unfavorable conditions in the pork and turkey markets.

BMO: The 'Storm Will Pass'

Offering the other side of the trade, BMO Capital Markets' Kenneth Zaslow maintains an Outperform rating on Hormel's stock but with a price target slashed from $45 to $38.

There is no doubt that Hormel is navigating through a difficult food commodity environment and the timing of any recovery remains unclear, Zaslow commented in a research report. But there is no doubt that the "unrelenting operating environment will pass" and the company will emerge stronger compared to prior cycles for four key reasons.

First, Hormel's management team boasts a superior long-term track record. Second, the issues plaguing Hormel aren't company specific and felt across the entire industry. Also, the company's underlying volume trends remain strong and any internal actions to improve the business will generate higher earnings power.

Hormel also holds the advantage of being able to deploy its cash flow to seek out accretive acquisitions, the analyst added. Also, the company can expand its international operations, such as in China and South America.

Related Links:

7 Biggest Price Target Changes For Friday

Benzinga's Top Upgrades, Downgrades For August 25, 2017
_______
Image Credit: Photo by René Sinn. Taken by myself. 2006-03-20, via Wikimedia Commons

© 2017 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.