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Hormel proves superior to Heinz after takeovers

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By Bloomberg News
Thursday, Oct. 4, 2012, 12:01 a.m.

Hormel Foods Inc., the maker of the iconic Spam canned meat used to feed Allied troops during World War II, produced the best return after takeovers among peers over the past decade by adding products such as Don Miguel burritos and preservative-free luncheon meats.

Hormel gained 11 percent when adjusting for volatility, the best among 14 companies with sales of at least $2 billion in meat, dairy, frozen, canned and perishable foods, a Bloomberg analysis shows.

The 121-year-old company, founded by the son of German immigrants in an abandoned creamery near Austin, Minn., had the highest total returns and the fifth-lowest volatility, beating second-ranked H.J. Heinz Co. of Pittsburgh and General Mills Inc., which came in third.

Hormel has made 14 acquisitions over the past decade, adding Mexican cuisine and packaged foods to its product range. That expansion has helped to mitigate the company's earnings volatility caused by commodity foods such as pork and poultry, which are vulnerable to jumps in feed costs.

“They have a well-balanced portfolio,” said Farha Aslam, a New York analyst for Stephens Inc. who has a hold rating on the shares. “The company emphasizes profits over its volume. That's what gets you returns.”

Net income over the past five years grew by an average of 11 percent annually as sales expanded 6.7 percent. Profit rose by an average of 3.3 percent at Heinz and 6.5 percent at General Mills over the same period. Hormel is the only company among the peer group with no net debt.

“Hormel Foods has established a steady record of rising earnings,” said Ken Shea, a Bloomberg Industries senior analyst.

While the company has a wide range of products, it focuses on investing in higher-margin items, Aslam said.

Hormel returned 221 percent for shareholders in the 10 years through September, compared with H.J. Heinz's 165 percent, General Mills's 137 percent, and Campbell Soup's 108 percent. Hormel had the lowest volatility after those three companies and Conagra Foods Inc., the maker of Orville Redenbacher's popcorn and Banquet frozen meals.

Hormel's last two acquisitions were Wholly Guacamole producer Fresherized Foods last year and Mexican-food supplier Don Miguel Foods Corp. in 2010. The price for each deal was not disclosed. Both businesses are part of MegaMex Foods LLC, a joint venture between Hormel and Mexico's Herdez Del Fuerte SA de CV.

Don Miguel makes fresh and frozen tacos, empanadas and burritos. Its addition helped sales in Hormel's grocery-product segment rise 21 percent in the three months through July from a year earlier, the company said Aug. 23.

Hormel also has gained from the growing popularity of turkey meat and its preservative-free line of Natural Choice luncheon meats among health-conscious U.S. consumers. The luncheon meats are placed in a cylinder-shaped chamber that uses up to 87,000 pounds per square inch of water pressure — five to six times that of the deepest ocean — to protect the foods against bacteria.

The company even boosted sales of its Spam brand domestically and in overseas markets such as South Korea. The 75-year-old pork product is now being offered in more than a dozen varieties, including with black pepper, cheese, bacon or hot and spicy.

“An important factor on Hormel's future growth will be how they invest cash,” Aslam said. “They have tremendous firepower.”

Rick Williamson, a Hormel spokesman, declined to comment.

Hormel seeks to increase sales by 5 percent a year and per-share profit by 10 percent, Chairman and Chief Executive Officer Jeffrey M. Ettinger said in a Sept. 6 conference call with analysts.

The company plans do that by raising turkeys, processing pork into Spam, producing its Compleats line of microwaveable meals and selling sealed trays of meats and cheeses, a product delis made for years that Hormel started to mass-market in 2000.

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