TSC Ratings' Updates: Hormel Foods

The following ratings changes were generated on Tuesday, Feb. 10.

We've upgraded Hormel Foods (HRL), which engages in the production and marketing of various meat and food products, from hold to buy. This rating is driven by the company's revenue growth, largely solid financial position with reasonable debt levels by most measures and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income.

Revnue rose by 11.8% compared with the same quarter last year, trailing the industry average of 36.4% growth. ROE slightly decreased, outperforming both the industry and the S&P 500. EPS declined by 31.5%, but we expect the company's pattern of declining EPS over the past year to reverse in the coming year. Hormel's debt-to-equity ratio is very low at 0.22 and is currently below that of the industry average, implying very successful management of debt levels, but its quick ratio of 0.72 is somewhat weak and could be cause for future problems.

Shares are down 19.5% over the past year, reflecting, in part, the market's overall decline. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.

We've upgraded Lorillard (LO), which manufactures and sells cigarettes, from hold to buy, driven by its increase in net income, revenue growth, notable return on equity, expanding profit margins and growth in earnings per share. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results.

Net income increased by 20.6% since the same quarter a year ago, outperforming the S&P 500 and the tobacco industry. Revenue rose by 13.7% but underperformed the industry. ROE also rose, a clear sign of strength within the company. EPS are up 24.4% compared with the year-ago quarter, and stable earnings per share over the past year indicate the company has sound management over its earnings and share float. We anticipate these figures will experience more growth in the coming year. Lorillard's gross profit margin of 45.4% is strong, having increased from the same quarter last year, and its net profit margin of 23.7% is above the industry average.

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