We have recently initiated coverage on Hormel Foods Corporation (HRL), a leading manufacturer and marketer of various meat and food products, as Neutral.
 
Hormel has strengthened its position through acquisitions, which is expected to be its fundamental growth strategy in the future. Given the company’s strong balance sheet and management’s track record of successful acquisition and integration of businesses over the years, we expect acquisitions to play a key role in its growth.
 
Acquisitions pose several potential risks for Hormel. Nevertheless, plans to increase spending on advertising would definitely help maintain and grow its market share in the future. We are confident about Hormel being able to restore top-line growth on an annualized basis in fiscal 2010, over and above the revenue gains that are expected to continue in the future.
 
Although the food market is highly competitive, a greater share of value-added branded products in Hormel’s product mix will help strengthen its margins and reduce exposure to commodity prices in the long term. The most promising in this respect is the company’s efforts in its meat business, part of its Refrigerated Foods segment.
 
The greater retail penetration of Hormel’s meat-branding activities, commenced in the 1996/97 period, hold a significant growth potential. However, the production and sale of meat and food products is highly competitive.
 
Recently, Hormel reported better-than-expected results for the fourth quarter and full year fiscal 2009. For full year 2009, net earnings were $342.8 million versus $285.5 million in 2008. Earnings per share (EPS) were $2.53 compared to $2.08 in 2008. Management expects full year fiscal 2010 EPS in the range of $2.63 to $2.73.
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