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Hormel: Hearty Meals, but Indigestive Stock

To that end, Hormel's January acquisition of the Skippy peanut butter brand "buttered up" the results. In fairness, this has been the growth method of the entire sector, which is still in a period of consolidation. From Campbell Soup Co. (CPB - Get Report) to Pepsico (PEP - Get Report), acquisitions have fueled the top line. The difference is, expectations for those companies are -- I believe -- more reasonable.

The Street is placing strong bets on Hormel for 2014, which assumes that the company can overcome several operating obstacles. Not the least of which is that Hormel just posted a decline in operating profit in the specialty foods segment, due to the loss of a large contract from a major customer. Management must figure out a way to offset that loss and get specialty foods back on track.

The other thing is, although company executives have spoken optimistically about margin improvement due to lower grain and turkey commodity prices, it's not clear if these sorts of benefits will be realized. Nor can we assume the extent that lower commodity prices will boost margins. Obviously, it will have some positive effects.

Nevertheless, this goes back to my original point that any positive effect from an operational perspective is already assumed in the stock price. Last but not least, I believe the Street is discounting the offsetting effects of high beef input costs, which has been an issue for most of the year. And to say nothing about the uncertainty that surrounds hog supplies, where animal activists have investigated/charged former Hormel suppliers with animal cruelty.

To Hormel's credit, however, management has taken swift and corrective action upon acquiring knowledge of these claims, including the development of what it calls a Quality Management System that details animal procurement and processing procedures.

So despite the bad publicity, I was impressed with the manner in which Hormel was able to demonstrate that this is still a great company with strong business prospects. But as I've said, smart investors already know this and already own the stock. And I don't see any scenario where buying this stock around $45 a share makes sense for new investors. But Hormel at under $40 would be very appetizing.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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