"Under the Radar" is a daily feature that uncovers little-known companies worthy of investors' consideration. Check in at 5 every morning to find out about stocks that tend to beat their bigger brethren.
If we have learned anything from the stock market in 2009, it's that the pendulum swings both ways. After a month-long selloff, investors embraced stocks last week and sent the
up about 7%. But rest assured, the waves of panic will return. Unemployment is still on the rise and some bellwethers will post disappointing earnings. Here is a defensive mid-cap company to consider when bearishness resumes.
makes and markets food products around the world. The company specializes in meats and offers them in every form: fresh, frozen, cured, smoked, cooked or canned. Founded in 1891 in Austin, Minn., Hormel has grown into a national purveyor of classic American products like Dinty Moore stew and everyone's favorite, Spam.
The company posted impressive fiscal second-quarter results. Although revenue was flat, net income increased 4% to $80 million and earnings per share improved 5% to 59 cents. The operating margin remained stable at 8% and the net margin stood at 5%.
Hormel has bolstered its cash position, adding more than $200 million of reserves since the recession hit. Yet a quick ratio of 0.9 indicates a less-than-ideal liquidity position. Our model prefers companies with quick ratios higher than 1. The debt burden has increased 20% over the past year and is now at $450 million. But Hormel's debt-to-equity ratio is still modest at 0.2. We give the company an overall financial strength score of 8.9 out of 10, higher than our "buy"-rated average.
Despite being laden with Spam, Hormel achieved a brisk run in 2009, climbing 13% and outperforming the
Dow Jones Industrial Average
and S&P 500. However, investors' enthusiasm has pushed the shares into premium territory. Hormel is trading at a price-to-earnings ratio of 17 and a price-to-book value ratio of 2.2, making it about 10% more expensive than its average packaged-foods rival.
Still, Hormel is cheaper than some of its larger peers like
, which is trading at a price-to-earnings ratio of 21, and
, with a P/E of 18.
Nevertheless, we rate Hormel a "buy" and expect solid outperformance into 2010. Consumer retrenchment will continue even when the economy starts to grow again. There's evidence that American thrift is back with a vengeance. The personal savings rate reached a 15-year high of 6.9% in May, and it's likely to continue to climb as unemployment peaks and Americans attempt to deleverage. Hormel's lineup of discount meats and microwaveable dinners will be hot-sellers for the rest of 2009.