Hormel: Hearty Meals, but Indigestive Stock

NEW YORK ( TheStreet) -- There's not much a company can do when the Street has fallen in love with its stock. While some management teams will look for opportunities to play down expectations, there are companies, like Hormel ( HRL), that revel in the challenge, especially when they know their growth prospects are actually better than perceived.

But I believe Hormel's stock, which has posted year-to-date gains of close to 50%, is expensive. I'm saying this even though I know that the company has a long history of margin expansion and above-average growth. Not to mention, when it comes to strong returns on capital, Hormel has compared favorably to other well-established brands, like Nestle (NSRGY) and Kraft Foods (KRFT), which I happen to like.

But the Street has come to expect this level of performance. And the way I see it, several of these metrics are already presumed in Hormel's current valuation, which carries a P/E of 24. Although that is still three points below the industry average, Hormel nonetheless trades at a multiple that is two points higher than Mondelez (MDLZ). This is even though Mondelez posts better gross margin and operating margin.

Essentially, new investors would be paying up for stock that has already outperformed not only the entire sector, but its own historical average. I'm not suggesting that a selloff is imminent. That the company was able to deliver fourth-quarter adjusted earnings per share of 58 cents, which was up 18.4% year over year, was indeed impressive.

I won't deny that the 7% year-over-year revenue growth, was a pleasant surprise -- especially given the dire state the entire food and beverage sector, which has been marred by poor volumes and weak prices. But as has been the case for other food rivals/peers like ConAgra (CAG), very little of Hormel's 7% growth was of the "organic variety," which measures a company's operational performances by excluding events such as mergers and acquisitions.

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