1. Alex Sutcliffe 01448486
Hormel Food Corporations Executive Summary
A comparison of Hormel’s stock returns to those of the S&P 500 index and a
financial analysis of the company itself reveal Hormel has performed consistently
well for its shareholders over the past several years. In January of 2010, Hormel was
trading close to $17. Within the past several months Hormel has approached share
prices of $60. No doubt, Hormel’s increasing market value is a reflection of a healthy
and competitive company.
Hormel share fluctuation has corresponded modestly with the S&P 500 (as shown in
graph); both have seen consistent growth in share price since January of 2010
without any sharp drops. Hormel’s share prices have experienced more volatility
than those of S&P 500, which is not surprising considering the S&P 500 has very
little unsystematic risk. The volatility in Hormel’s stock price has favored its
investors rather than hurt them. A choice of investing Hormel in 2010 would be
substantially more profitable than the less risky index.
Hormel’s returns for the past five years measured against those of the S&P 500 (a
rough approximation of the market portfolio) yield a Beta of approximately .66.
Examining the graph of returns, it is evident that while Hormel generally performs
similarly to the “market”, there are some dozen periods of time in which Hormel’s
share price behaves very differently than the S&P. Judging from the graph these
instances of idiosyncratic risk, ostensibly unrelated to factors affecting the “market”,
account for the .66 Beta calculated. Hormel has a substantial amount of
nonsystematic risk, whereas the S&P has very little due to diversification among
many firms. Alternatively Yahoo Finance calculates Hormel’s Beta at .94. This
difference is likely due to a much shorter time period (probably 52 weeks) Yahoo
used for its particular calculation. Also, Yahoo may have used several large indexes
in estimating Hormel’s systematic risk.
Financial Analysis
Hormel’s fast increasing share price is evidence investors see the firm’s profitability
growing substantially, and while Hormel has performed well, the share price may
seem overstated when examining key financial statistics. Notably, Hormel’s liquidity
has dropped substantially. The amount of cash and equivalents Hormel reported in
2014 covered 30% of its current liabilities. Two years prior, cash was 90% of
current liabilities. Perhaps of more importance, over a two-year period, Hormel
return on equity decreased slightly. While these ratios don’t predict the decline of
Hormel, they certainly do not explain the continued growth in share price. Hormel
has, however, maintained a high equity to debt ratio. Hormel has consistently
financed its operations 2:1 equity to debt financing. Perhaps Hormel used a large
amount of liquid assets in capital investments in order to maintain its low leverage.
The amount Hormel has spent on investments in the form of Goodwill has been
substantial in the past two years. Perhaps they have acquired a company or well-
known brand that has excited investors.
6. Hormel Financial Statements
Income Statement
Period Ending 26-Oct-14 27-Oct-13 28-Oct-12
Total Revenue 9,316,256 8,751,654 8,230,670
Cost of Revenue 7,751,273 7,338,838 6,898,819
Gross Profit 1,564,983 1,412,816 1,331,851
Operating Expenses
Research Development - - -
Selling General and Administrative 650,948 627,340 605,868
Non Recurring - - -
Others - - -
Total Operating Expenses - - -
Operating Income or Loss 931,620 805,989 764,674
Income from Continuing Operations
Total Other Income/Expenses Net 3,236 4,971 6,520
Earnings Before Interest And Taxes 934,856 810,960 771,194
Interest Expense 12,704 12,453 12,859
Income Before Tax 922,152 798,507 758,335
Income Tax Expense 316,126 268,431 253,374
Minority Interest -3,349 -3,865 -4,911
Net Income From Continuing Ops 620,262 546,724 538,741
Non-recurring Events
Discontinued Operations - - -
Extraordinary Items - - -
Effect Of Accounting Changes - - -
Other Items - - -
Net Income 602,677 526,211 500,050
Preferred Stock And Other Adjustments - - -
Net Income Applicable To Common Shares 602,677 526,211 500,050
Balance Sheet
Period Ending 26-Oct-14 27-Oct-13 28-Oct-12
Assets
Current Assets
Cash And Cash Equivalents 334,174 434,014 682,388
Short Term Investments - - 77,387
Net Receivables 722,057 625,043 592,061
Inventory 1,054,552 967,977 950,521
Other Current Assets 21,988 20,379 18,327
Total Current Assets 2132771 2047413 2,320,684
Long Term Investments 264,451 270,609 286,537
7. Property Plant and Equipment 1,001,767 955,333 924,480
Goodwill 1,226,406 934,472 630,875
Intangible Assets 554890 378093 123,072
Accumulated Amortization - - -
Other Assets 275,334 304,874 134,073
Deferred Long Term Asset Charges - 25,086 144,245
Total Assets 5455619 4915880 4,563,966
Liabilities
Current Liabilities
Accounts Payable 954,692 784,009 786,300
Short/Current Long Term Debt - - -
Other Current Liabilities - - -
Total Current Liabilities 954,692 784,009 786,300
Long Term Debt 250,000 250,000 250,000
Other Liabilities 614869 565292 702,741
Deferred Long Term Liability Charges 24,002 - -
Minority Interest 6,378 5,539 5,470
Negative Goodwill - - -
Total Liabilities 1849941 1604840 1,744,511
Stockholders' Equity
Misc Stocks Options Warrants - - -
Redeemable Preferred Stock - - -
Preferred Stock - - -
Common Stock 7,724 7,725 7,707
Retained Earnings 3,805,654 3,452,529 3,135,317
Treasury Stock - - -
Capital Surplus - - -
Other Stockholder Equity -207,700 -149,214 -323,569
Total Stockholder Equity 3,605,678 3,311,040 2,819,455
Net Tangible Assets 1,824,382 1,998,475 2,065,508
8. Dupont and Liquidity Analysis
Return on
Equity (ROE)
Net Profit
Margin
(NPM)
Asset
Turnover
(ATO)
Equity
Multiplier
(EM)
NI/Equity NI/Sales Sales/Assets Assets/Equity
28-Oct-12 0.177 0.061 1.803 1.619
27-Oct-13 0.159 0.06 1.78 1.485
26-Oct-14 0.167 0.065 1.708 1.513
Current Ratio Quick Ratio Cash Ratio
CA/CL (CA-Inv)/CL Cash/CL
28-Oct-12 2.951 1.743 0.868
27-Oct-13 2.611 1.377 0.554
26-Oct-14 2.234 1.129 0.35
