Hormel Foods: A Star in the Prepared Foods Business

NEW YORK (TheStreet) -- This morning I read a tantalizing article by one of my favorite personalities and analysts, Jim Cramer, titled "When a CEO Takes Your Breath Away."

I've interviewed some CEOs who took people's breath away by firing them or by running the company they led into the ground. Cramer was speaking of great CEOs who "take your breath away" by making brilliant calls and prescient decisions.

One that he singled out, Jeff Ettinger, is the CEO of Hormel Foods ( HRL). Early on Jan. 4, HRL was upgraded to Outperform from Underperform by CLSA to reflect Hormel's recent acquisition of the Skippy peanut butter business from U.K.-based Unilever ( UL), another smartly led company.

CLSA said the acquisition of the famous brand label peanut butter diversifies Hormel's U.S. portfolio and increases its emerging market exposure. The price target was lifted to $37 from $32. UL, which already has a broad and diversified product line, needed the cash to help support its total debt load and to sustain its generous 3.2% dividend, which represents a 65% payout ratio.

Zacks Equity Research offered the following: "Introduced in 1932, Skippy holds the second largest market share in the US for natural peanut butter category, offering as many as 11 varieties of shelf-stable peanut butter products. In the US, peanut butter accounts for businesses amounting to $2 billion and is the second most popular sandwich spread after ham.

"The product line has a presence in over 30 countries spreading over five continents around the globe. Consequently, the acquisition is likely to be accretive with immediate effect italics added. On the other hand, Unilever has divested the business as a result of a decline in revenue from its foods segment."

This important acquisition was priced at $700 million and is subject to regulatory approvals. According to Zacks, "The total annual sales from Skippy are estimated to be $370 million out of which $100 million is expected from countries outside the US."

This move by Hormel and its CEO is seen as a proactive step to expand its product portfolio in view of increasing raw material costs and the apparent slowing in demand of its main products such as meat. If you'll excuse the pun, anyway you slice it this transaction should fall right to HRL's bottom line.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

Cramer wrote regarding Hormel's decision, "The company will now dominate lunch, particularly the-bring-your-own-lunch contingent -- perfect for a country where the average worker is making less and less each year. Hormel is the player in ham, the No. 1 sandwich meat; this buyout will now make it the No. 2 player in peanut butter, the second-most-favored sandwich. It's incredible how smart that is."

"Plus," Cramer pointed out, "Skippy fits perfectly into Hormel's Chinese strategy, as it can be the best-of-breed U.S. player in two foods that are loved in that country." Now I hear the cash register "ca-chinking" and the flow of new moneys heading for Hormel's drawer.

The five-year chart below is like a picture that paints a thousand words. It not only shows the price but also HRL's declining free cash flow yield (important for sustaining the dividend) and it's improving quarterly income from continuing operations. The purchase of Skippy should help with the free cash flow yield.

HRL Chart HRL data by YCharts

The next earnings date for Hormel isn't until Feb. 21. Meanwhile shareholders will be paid a 2% dividend yield-to-price based on Friday's average share price of around $34, a 2.7% price increase from Thursday's close. Friday's volume was double the three-month average-daily-volume.

The investment community is rewarding savvy leadership and accretive transactions. They also like the fact that last quarter HRL increased its year-over-year earnings-per-share by 13%. As of Jan. 3, HRL had total debt of only $250 million, but its levered free cash flow (TTM) was a healthy $356 million.

Those of us who don't own shares of HRL yet might want to wait until the "Skippy-deal" celebrating is over and the stock pulls back. For example, on Jan. 2, the intraday low price was $31.46. The takeaway here is that HRL has smart leadership and a bright future. Its CEO is a shining example of "... the kind we need to see from companies to propel their stocks higher despite severe Washington headwinds" according to Jim Cramer.

At the time of publication the author held no positions in any of the companies mentioned.

Most large cap stocks were once small and mid-cap stocks. Bryan Ashenberg is here to help you find the cream of the crop amongst the market chaos.

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

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