Hormel Foods trades at $26.16 and has moved in lockstep with the market. Its shares have returned 8.2% over the last six months while the S&P 500 has gained 6.8%.
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Why Do We Think Hormel Foods Will Underperform?
We’re cautious about Hormel Foods. Here are three reasons why there are better opportunities than HRL, plus one 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 3.1% 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
At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.
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 16.2% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $83.83 went towards paying for raw materials, production of goods, transportation, and distribution.
3. EPS Trending Down
Analyzing the long-term 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 6.2% annually over the last three years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
Final Judgment
Hormel Foods falls short of our quality standards. That said, the stock currently trades at 17× forward P/E (or $26.16 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a top digital advertising platform riding the creator economy.
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