Hormel Foods currently trades at $28.40 per share and has shown little upside over the past six months, posting a small loss of 0.6%. The stock also fell short of the S&P 500’s 5% gain during that period.

Is there a buying opportunity in Hormel Foods, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Hormel Foods Not Exciting?

We're cautious about Hormel Foods. Here are three reasons why HRL doesn't excite us and a stock we'd rather own.

1. Demand Slipping as Sales Volumes Decline

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

Hormel Foods’s average quarterly sales volumes have shrunk by 2.4% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable.

2. Low Gross Margin Reveals Weak Structural Profitability

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Hormel Foods has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 16.7% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $83.30 went towards paying for raw materials, production of goods, transportation, and distribution.

3. EPS Trending Down

Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Hormel Foods, its EPS declined by 6.5% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

Final Judgment

Hormel Foods isn’t a terrible business, but it isn’t one of our picks. With its shares lagging the market recently, the stock trades at 16.3× forward P/E (or $28.40 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.

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