A joint venture between Hormel Foods Corporation (HRL) and Mexico-based Herdez Del Fuerte, S.A. de C.V. named MegaMex Foods LLC completed the acquisition of Don Miguel Foods Corp. entirely from TSG4 L.P., a private equity fund sponsored by TSG Consumer Partners LLC, and private investors.
The intention was declared in September 2010, but the financial terms were not declared. The acquisition is expected to help Hormel penetrate convenience stores, club stores and supermarkets as Don Miguel is one of the leading providers of branded frozen and fresh authentic Mexican flavored appetizers and snacks.
With no long-term debt burden, Hormel has the financial flexibility to pursue fruitful acquisitions. 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 the company’s growth going forward.
Hormel’s recent transactions include Boca Grande Foods Inc. (manufacturer, seller, and distributor of liquid portion products) in June 2008 and Burke Corporation (manufacturer and marketer of pizza toppings and other fully cooked meat products) in August 2007.
Strong third quarter results based on improved demand, attributable to the gradual market recovery, motivated management to raise its full-year EPS guidance range from $2.75 – $2.85 to $2.85 – $2.91.
Over the longer term, we believe that the greater share of value-added branded products in Hormel’s product-mix will help strengthen its margins and reduce its exposure to commodity prices.
However, the highly competitive food market and volatile raw material costs are difficult issues that need to be addressed. Thus, we reiterate our long-term Neutral recommendation. The stock currently retains its Zacks #3 Rank (short-term rating as “Hold”).
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