Smithfield Foods, Inc. (SFD), Campbell Soup Company (CPB): How to Feed a Dragon and Make Money

Based in Austin, Minnesota, Hormel Foods Corporation (NYSE:HRL) is a producer and marketer of meat and food products. Hormel may come as a surprise to some, given that the company this week lowered its earnings forecast for fiscal year 2013. In fact, the downward revision led to a pullback in HRL shares, which have gained more than 27% this year. However, Hormel is a long-term play, and it presents long-term opportunities from in China.

Hormel Foods Corporation (NYSE:HRL) lowered its outlook for fiscal 2013 earnings from $1.93-$2.03 per share to $1.88-$1.96 per share mainly due to lower-than-expected results in its pork operations, higher input costs and softer sales of its retail products in the refrigerated segment. However, CEO Jeffery M. Ettinger is bullish about the company’s future earnings potential.

Ettinger’s bullish outlook is being driven partly by a thriving international business. In the recently reported fiscal 2013 second-quarter results, Hormel posted a 21% sales growth and a 21% improvement in profit in its international & other segment. The improvement was partly driven by better results by the company’s operations in China. In a conference call following the quarterly earnings, Ettinger noted that the company expects continued sales growth and efficiency gains from its business in China.

In addition, Hormel is also expected to benefit from the acquisition of the Skippy® peanut butter business. Skippy peanut butter is a leading brand in China. Hormel has closed the acquisition of Skippy’s worldwide business, except in China. The company expects to close the acquisition of China business by the end of its fiscal year 2013.

HRL shares have seen a pullback in the last two days, however, this should be seen as a buying opportunity, given the company’s long-term outlook. The stock trades at a Price/Earnings (P/E) multiple of 20.99, which is higher than,Tyson Foods’s P/E ratio of 17.56. However, Hormel has a diversified business, and is seeing an improvement in its China operations.  Therefore the slight premium is justified.

Rising food demand in China offers an excellent long-term opportunity for food processing companies. Given their improving operations in China, Hormel is well-positioned to capitalize on this opportunity.

The article How to Feed a Dragon and Make Money originally appeared on Fool.com and is written by Varun Chandan.

Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Varun is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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