And We Thought Spam Was Recession-Proof (HRL)

There was an interesting warning on 2008 earnings this morning, although it seems almost counter-intuitive.  Hormel Foods Corp. (NYSE: HRL) is almost back at 52-week lows this morning.  The company is citing weak financial markets and rising operating costs for the lower earnings.

The maker of Spam now sees fiscal-2008 earnings of $2.03 to$2.09 per share rather than $2.22 to $2.28, and that is also well under theFist Call number of $2.25.  What is more interesting than the numbers is the breakdown of what is coming up short.

The company has blamed above-plan costs and what it called an"unfavorable product mix" in grocery products, jargon for "peoplearen’t buying enough of our products."  Its Jennie-O Turkeyresults were under plan and the company talked about record commodityprices and great increases in its feed prices that aren’t entirely ableto be passed down to the consumer.

The company notedthat it is looking on how much to raise prices as its costs for fuel,meat, and other items were running above its own price increases.  The financial market turmoil isn’t on the food operations, but it has had an effect on the rabbi trust investment returns.

Even if we take the $2.09 EPS number for the high-end under a new bestcase scenario, its forward P/E ratio is sort of in-line with theS&P at 14.6.  That isn’t expensive, but it also isn’t dirt cheapfor a food stock that is having cost pressures and what sounds likepricing power and product mix issues.

Shares have recovered slightly from the morning lows and we show atrading low of $28.51 if that is an accurate print.  Shares are downover 10% at $30.46 this morning and the prior 52-week trading range was$29.63 to $42.77.

Jon C. Ogg
October 20, 2008