Hormel Foods Corp. chief executive Jeffrey Ettinger said today he expects continued higher hog prices the rest of this year.
While that may be good news for pork producers, it raises questions whether Hormel can fatten its profits much further, analysts say.
Earlier today, Hormel’s quarterly results topped analysts’ expectations, and the Austin, Minn.-based company raised its profit forecast for 2010. But Hormel shares fell as much as 3.3 percent amid skepticism whether the company can pass along higher costs to supermarkets and restaurants.
Strength in Hormel’s pork cutout margins appears to be decelerating as costs rise, Janney Capital Markets analyst Jonathon Feeney said. Absent a major acquisition for Hormel, “we see difficulty growing (earnings per share) in 2011,” Feeney said in a report today.
Hormel’s performance in coming months should offer an indicator for beef and pork producers as to whether their recent return to profitability – thanks to rallies in cattle and hog prices – will be sustained by improved demand from U.S. consumers.
Many supermarkets are battling major discounters such as Wal-Mart Stores, Inc., and retailers have largely been reluctant to raise prices with the economy still sluggish, analysts say. Retailers have also been actively promoting discounted pork and chicken, rather than raising prices in the meat case.
Feeney said he’s “concerned” recent margin strains in Hormel’s grocery and refrigerated foods businesses could persist.
“Given the promotional environment we’re hearing about so consistently among food retailers in meats, we expect that pressure to continue,” Feeney said. He has a “neutral” rating on Hormel shares.
Operating profit in Hormel’s grocery products unit tumbled 24 percent in the three months ended April 25, to $33 million, the company said today.
While wholesale prices for meat and other foods have increased in recent months, price increases at the retail level have been relatively tame, government data showed.
During April, “food at home” prices were up 0.1 percent from March and unchanged from the same month in 2009, the U.S. Labor Department said in a report today.
“Hog and cattle prices are up sharply which has led to a significant appreciation in the price that food producers have to pay for pork and beef,” livestock analysts Steve Meyer and Len Steiner said in a report today.
However, “It will likely take a few more months for retail food prices to move higher, and even then they may not increase as much as retailers and food manufacturers tighten margins and benefit from lower labor costs,” Meyer and Steiner wrote.
Hog prices, based on Chicago futures, have almost doubled since August, reflecting widespread herd reduction after losses swelled during the previous two years.
Slaughter-ready pigs will average $60 to $62 per hundred pounds during the current quarter, up from $42.74 a year earlier, based on live animal prices, according to USDA forecasts. During the third quarter, hogs are expected to average $59 to $63, up from $38.90.
Hormel, the fifth-largest U.S. pork processor, is insulated from higher hog costs in part because its Jennie-O turkey and specialty foods segments are still posting robust profits.
In the most-recent quarter, Hormel had net income of $77.9 million, or 57 cents a share, down from $80.4 million, or 59 cents, a year earlier. Sales rose 6.6 percent to $1.7 billion.
Excluding expenses from a plant closing and taxes stemming from new healthcare laws, Hormel earned 67 cents a share, beating analysts’ expectations by about 6 cents, according to Thomson Reuters I/B/E/S.
In late trading today, Hormel shares fell $1.13 to $40.65. The stock is still up 5.9 percent this year.