Investors loading up on Hormel Foods Corp. shares might find appetites curbed by the recent surge in hog prices, analysts say. Hog futures traded in Chicago have rallied more than 50 percent over the past six months, and prices are expected to climb another 14 percent or so by mid-year, based on today’s prices.
That apparently hasn’t deterred some investors, who this week pushed Hormel shares to the highest level since May 2008. Hormel, the fifth-largest U.S. pork processor, reports financial results for its most-recent quarter tomorrow morning.
North American pork producers are entering a third year of contraction, trimming herds in an effort to stem losses. That means hog buyers will be paying even more for slaughter-ready animals, crimping margins for companies such as Hormel, analysts say.
The higher-cost outlook prompted Janney Capital Markets analyst Jonathan Feeney earlier this month to reduce his 2010 earnings forecast for Hormel, to $2.42 a share from $2.52. Hormel earned $2.53 a share in 2009.
“Given just how feverishly hog costs jumped in the second half of 2009 and the typical seasonal move during the spring months… our lowered margin assumptions are appropriate,” Feeney wrote in a Feb 12 report. “Further complicating matters,” Feeney said, “is the still-robust outlook for hog inflation.”
Hogs averaged $68.25 per hundredweight on a carcass basis during the November-January quarter, up 7 percent from $58.62 during the same period a year earlier, Feeney said. Meanwhile, pork prices “have not quite kept up,” he said.
In futures trading today, CME Group lean hogs for June delivery rose 0.575 cent to 78.8 cents a pound, or $78.80 per hundred pounds. April futures rose 0.85 cent to 69.125 cents. CME futures reflect carcass prices.
Further underscoring the pork industry’s downsizing, the USDA today said the Canadian hog breeding herd as of Jan.1 was 1.335 million head, down 4.3 percent from a year earlier.
Combined, U.S. and Canadian breeding herds as of December totaled 7.185 million head, down 3.6 percent from December 2008, the USDA said in a report. Analysts view the breeding herd size as a key indicator of pork supplies six to 18 months in the future.
“The hog production industry still remains well-below historically normal profit levels, which likely foretells less supply and higher prices in the immediate term,” Feeney wrote. He has a “neutral” rating on Hormel shares.
Still, shares of Hormel and other meat processors such as Tyson Foods, Inc., have outperformed the broader market in recent months. That partly reflects expectations that demand for steaks, chops and other meats will improve as the economy recovers.
Austin, Minn.-based Hormel also has profitable business beyond its pork processing, including Jennie-O turkey and branded grocery products, such as Lloyd’s Barbeque Co.
Hormel is expected to earn about 68 cents a share in the company’s most-recent quarter, according to analysts surveyed by Bloomberg LP. That’s up from 60 cents a year earlier. In the quarter ended Oct. 25, Hormel’s net earnings rose 53 percent to $103.9 million, or 77 cents a share.
Shares of Hormel rose 20 cents to $40.46 in late trading today. The stock is up 31 percent over the past 12 months.