May 25, 2011 / 11:31 AM / 6 years ago

Hormel shares fall on long-term margin questions

NEW YORK (Reuters) - Concerns about how much higher grain costs would hurt Hormel Foods Corp’s (HRL.N) margins sent its shares down more than 5 percent on Wednesday and the company said it will need to raise prices again to offset soaring commodity costs.

Hormel, like other meat companies, has had to pay higher prices for beef and pork because of smaller cattle and hog herds and strong meat exports. In addition, high corn prices -- the result of more corn going to exports and to make ethanol -- has increased production costs for the nation’s poultry producers.

Hormel already had raised prices on many of its products, which include Spam canned ham and Dinty Moore stew, but said it will have to raise prices again this year.

“We’re confronted with needing to do a second wave of pricing and other efficiency gains to try to offset those,” Chief Executive Jeff Ettinger said in an interview. “That will be the challenge of the second half.”

Ettinger said he expects to be able to make up for the cost increases, but that it would take time.

Standard & Poor’s Equity Analyst Tom Graves downgraded Hormel shares to “sell” from “hold,” due to expectations that pressure on profit margins will limit upside to the stock.

“We have increased concerns about prospects of future profit pressure in pork and turkey businesses, including higher grain costs,” Graves said in a note.

Hormel shares were down $1.77, or 5.8 percent, at $28.25 in afternoon trading on the New York Stock Exchange.

Jefferies analyst Jeff Farmer said Hormel had been trading at 18.5 times forward earnings, above the stock’s average five-year multiple of 16 times earnings, which is also the average of the packaged food segment.

“Hormel’s premium multiple will be increasingly difficult to defend if the company’s margin momentum continues to slow,” Farmer said in a research note.

Hormel reported net income of $109.6 million, or 40 cents per share, for the second quarter that ended May 1, up from $77.9 million, or 29 cents per share, a year earlier.

The results met the analysts’ average earnings estimate, according to Thomson Reuters I/B/E/S.

Net sales rose to $1.96 billion from $1.70 billion, while analysts had expected $1.82 billion.

Volume rose 7 percent, driven by gains of 4 percent in refrigerated foods, 17 percent at the Jennie-O Turkey Store, 2 percent for grocery products and 6 percent for specialty foods.

Hormel said on Wednesday that it expected to earn $1.67 to $1.73 per share this year, up from a prior range of $1.62 to $1.68.

The company cited strength in its refrigerated foods segment, which includes Hormel meats, and benefited from strong pork operating margins. It also said higher commodity meat prices and cost savings lifted the Jennie-O Turkey Store results.

Reporting by Martinne Geller, editing by Dave Zimmerman and Maureen Bavdek

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