NEW YORK (TheStreet) -- Wall Street has a great appetite for Hormel Foods (HRL - Get Report) . With the stock trading at a price-to-earnings ratio of 24, the company that brings you Skippy peanut butter and Spam meat enjoys a premium valuation.
Not only is that multiple one point higher than the industry average P/E of 23, according to Yahoo! Finance, it's also eight and 10 points higher than ConAgra (CAG) and Tyson Foods (TSN) , respectively.
Hormel stock currently trades around $51. The shares are up 12% on the year to date, outperforming the 9% gain of the packaged food sector, according to Morningstar.
There's no denying that Hormel has a great business. Led by a committed management team, Hormel, unlike some of its peers, continues to deliver strong organic growth and carries a clean balance sheet.
To top it off, the company has executed some well-timed accretive deals, including its 2013 acquisition of Skippy peanut butter from Unilever (UL) .
Still, Hormel's valuation no longer jibes with the growth currently produced. Although 6% year-over-year revenue growth is in line with expectations, I can also buy shares of Tyson Foods at a much cheaper multiple. Not only is Tyson is growing at 11% year over year, Tyson is delivering more in earnings per share.
What's more, other well-established brands such as Nestle (NSRGY) and Kraft Foods (KRFT) are outperforming Hormel when it comes to return on capital. In the case of Kraft, investors can buy the company at half the P/E of Hormel (12) and Kraft pays a 3.80% yield compared to a Hormel's 1.80% dividend.
The way I see it, Wall Street is rewarding Hormel for what it has already done. But at around $50 per share, I don't see much upside, beyond, say $55. Kraft, on the other hand, which more than doubled Hormel's gross margin (36% vs. 17%), can deliver 20% more in value in the next 12 to 18 months. This is because on a forward-looking basis, Kraft, which has 2015 estimates of $3.41, according to Yahoo! Finance, is still two points cheaper than Hormel.
This means new investors are willing to pay top dollar today for stock that has already outperformed the entire sector. I don't think it makes sense to place any bets at this point. The smart thing to do would be to wait for a pullback to the mid-$40 level.
At around, say, $42 to $45 per share, the P/E drops to about 20, or three points below the industry average. Investors can then ride the Hormel gravy train back up into a more promising 2015.
At the time of publication, the author held no position in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates HORMEL FOODS CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:
"We rate HORMEL FOODS CORP (HRL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, increase in stock price during the past year and impressive record of earnings per share growth. We feel these strengths outweigh the fact that the company shows weak operating cash flow." You can view the full analysis from the report here: HRL Ratings Report