Hormel Foods Corporation (HRL) in Austin, Minn., and Camden, N.J.-based Campbell Soup Company (CPB) are two prominent players in the packaged foods industry. HRL develops, processes, and distributes various meat, nuts, and food products to retail, food service, deli, and commercial customers through its Grocery Products; Refrigerated Foods; Jennie-O Turkey Store; and International and Other segments. It sells its products primarily through sales personnel, independent brokers, and distributors. In comparison, CPB manufactures, and markets branded convenience food products, including soups and sauces, biscuits and confectionery, and food service through its Meals and Beverages and Snacks segments. It sells its products through retail food chains, mass discounters and merchandisers, club stores, convenience stores, drug stores, dollar stores, e-commerce, and independent contractor distributors.
Intensifying supply chain disruptions and rising commodity costs have been pushing food prices higher. However, the strong demand for packaged food products and offerings of new products to meet changing consumer tastes should allow packaged food makers to profit substantially.
Investor interest in the consumer defensive industry is evident from the Invesco Dynamic Food & Beverage ETF’s (PBJ) 3.7% gains over the past three months versus the SPDR S&P 500 Trust ETF’s (SPY) 9.4% loss. The global packaged food market is expected to grow at a 6.3% CAGR to $4.26 trillion by 2026. So, both CPB and HRL should benefit. While HRL has gained 6.2% in price year-to-date, CPB has surged 7.9%. CPB is a clear winner with 4.1% gains over the past month versus HRL’s 1.1% loss. But which of these stocks is a better pick now? Let’s find out.
Recent Financial Results
HRL’s net sales for its fiscal year 2022 first quarter, ended Jan. 30, 2022, increased 23.7% year-over-year to $3.04 billion. The company’s gross profit came in at $538.75 million, up 19.7% from the prior-year period. Its operating income came in at $319.68 million for the quarter, indicating a 19.3% rise from the prior-year period. While its net earnings increased 7.8% year-over-year to $239.71 million, its EPS grew 7.3% to $0.44. As of Jan. 30, 2022, the company had $824.43 million in cash and cash equivalents.
For its fiscal year 2022 second quarter, ended Jan. 30, 2022, CPB’s total net sales decreased 3.1% year-over-year to $2.21 billion. The company’s adjusted gross profit came in at $671 million, down 12.9% from the year-ago period. Its adjusted EBIT was $318 million, representing a 16.8% decline from the prior-year period. CPB’s adjusted net income decreased 16.5% year-over-year to $208 million. And its adjusted EPS came in at $0.69, representing a 15.9% year-over-year decline. As of January 30, 2022, the company had $357 million in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, HRL’s EBIT and levered free cash flow have increased at CAGRs of 1.2% and 5.9%, respectively. Its EPS has decreased at a 1% CAGR over the past three years.
HRL’s EPS is expected to increase 11.6% year-over-year in fiscal 2022, ending Oct. 31, 2022, and 8.8% in its fiscal year 2023. Its revenue is expected to grow 8.4% in its fiscal 2022 and 2.8% in fiscal 2023. Analysts expect the company’s EPS to grow at an 8.5% rate per annum over the next five years.
CPB’s EBIT, EPS, and levered free cash flow have increased at CAGRs of 2.9%, 25.5%, and 10.5%, respectively, over the past three years.
Analysts expect CPB’s EPS to decline 6.7% year-over-year in its fiscal year 2022, ending July 31, 2022, and increase 3.2% in its fiscal 2023. Its revenue is expected to decline 0.8% year-over-year in its fiscal 2022 and rise 1.6% in fiscal 2023. Analysts expect the company’s EPS to grow at a 0.8% rate per annum over the next five years.
Valuation
In terms of forward EV/Sales, HRL is currently trading at 2.52x, which is 10.5% higher than CPB’s 2.28x. In terms of forward EV/EBITDA, CPB’s 11.87x compares with HRL’s 19.09x.
Profitability
HRL’s trailing-12-month revenue is almost 1.4 times CPB’s. However, CPB is more profitable, with a 31.5% gross profit margin versus HRL’s 17.1%.
Furthermore, CPB’s ROE, ROA, and ROTC of 29.5%, 7.1%, and 9.8%, respectively, compare with HRL’s 13.6%, 6.6%, and 8.2%.
POWR Ratings
While CPB has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, HRL has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
CPB has a B grade for Quality, which is consistent with its higher-than-industry profitability ratios. CPB’s 20.7% trailing-12-month EBITDA margin is 57.1% higher than the 13.2% industry average. While HRL’s C grade for Quality is in sync with its lower-than-industry profit margins. HRL has a 12% trailing-12-month EBITDA margin, which is 8.7% lower than the 13.2% industry average.
In terms of Value, CPB has been graded a C, which is in sync with its slightly higher-than-industry valuations. CPB’s 1.68x trailing-12-month Price/Sales is 32% higher than the 1.27x industry average. HRL’s D grade for Value is reflected in its overvaluation. HRL has a 2.29x forward Price/Sales, which is 80% higher than the 1.27x industry average.
Among the 87 stocks in the B-rated Food Makers industry, CPB is ranked #24, while HRL is ranked #71.
Beyond what we have stated above, our POWR Ratings system has also graded CPB and HRL for Sentiment, Stability, Momentum, and Growth. Get all CPB ratings here. Also, click here to see the additional POWR Ratings for HRL.
The Winner
Despite rising food prices, strong demand for packaged food products should benefit HRL and CPB in the coming months. However, we think its relatively lower valuation and higher profitability make CPB a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Food Makers industry.
HRL shares were trading at $51.63 per share on Tuesday afternoon, down $0.19 (-0.37%). Year-to-date, HRL has gained 6.86%, versus a -12.11% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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