HRL

Hormel's third quarter of fiscal 2025 (period ended July 27) was a clean readthrough of the debate. Organic net sales were strong across the portfolio, but earnings fell short as input costs reinflated, particularly in pork and other proteins. Management's fourthquarter outlook calls for USD 3.153.25 Bn of sales and USD 0.360.38 of GAAP EPS (USD 0.380.40 adjusted), with profit recovery lagging into next year despite targeted price increases and continuing execution on the Transform & Modernize ("T&M") program. The message is clear: top line momentum is intact, but gross margin recovery has been deferred, not derailed. I am willing to underwrite that timing risk at today's multiple and yield.

Hormel is a branded protein and snacking company with three reportable segmentsRetail, Foodservice, and Internationalreorganized to match how the chief operating decision maker evaluates performance. Brands like SPAM, SKIPPY, PLANTERS, JennieO turkey and Applegate give it durable shelf presence and scale in center store, plus pricing power that usually shows up with a lag when costs move. The 2024 Form 10K confirms revenue concentration in Retail but highlights Foodservice as an important profit engine; it also frames the T&M initiative as a multiyear modernization and footprint optimization effort designed to lift margins through fiscal 2026.

The nine months of FY25 show the mechanics. Net sales rose to USD 8.92 Bn, gross profit margin ran ~16.2%, and operating income reached USD 716 Mn; depreciation and amortization is tracking toward ~USD 260 Mn for the year. Equity income from affiliates (notably MegaMex) continues to contribute, while interest expense is modest at ~USD 58 Mn yeartodate on a conservative debt stack. With a 22% tax rate and ~551 Mn diluted shares, the earnings power is most sensitive to gross margin mix rather than leverage or share count. The quarterly tableau underscores this: Retail and Foodservice posted solid organic growth, but segment profits declined on higher input costs and SG&A. That is exactly what tends to reverse when pricing and productivity catch up to commodity shocks.

Two idiosyncratic drags should fade. First, supply disruptions at the PLANTERS Suffolk, Virginia facility that hurt 2024 volumes have been addressed; the plant returned to service last fall, and management has leaned on copackers to restore fill rates. The CFO flagged an expected Planters momentum recapture from the second quarter of FY25 onwardconsistent with improving retail trends through mid2025. Lower peanut input prices versus 20232024 highs should also help the 2026 gross margin in snacks if the harvest and carryout data hold.

Second, the turkey cycle is normalizing. After a year of wholebird compression, U.S. turkey supply in 2025 remains tight and prices elevated due to HPAI and industry consolidation, with USDA's livestock outlook pointing to reduced annual production and higher late2025 wholesale prices. For an integrated producer with a strong JennieO franchise, that backdrop tends to support revenue and mix as the company steers toward valueadded products rather than pure commodity volumes. Put differently, a tighter turkey market is not the problem it was in early 2024.

The capital structure is straightforward: USD ~2.86 Bn of senior unsecured notes laddered into 2027/2028/2030/2051 at fixed coupons (4.80%, 1.70%, 1.80%, 3.05%, respectively), no revolver borrowings, and cash/marketable securities near USD 630 Mn at the July quarterend. Net debt is about USD 2.23 Bnlow relative to EBITDAand covenants are conventional. This is a dividend compounder; in Q3 the board raised the annual dividend to USD 1.16 per share (USD 0.29 quarterly), marking the 59th consecutive increase. That 4.8% cash yield is real carry while we wait for margin normalization.

Two portfolio moves clean up the story. The sale of Hormel Health Labs in late 2024 slimmed noncore exposure in Foodservice. Early in FY25 the company sold Mountain Prairie, a sow operation, and recorded a small loss; management explicitly treats that as noncore and not indicative of ongoing performance. These disposals simplify mix and focus capital on higherreturn branded platforms.

I start from reported dynamics and management guideposts. Q3 adjusted operating income was USD 254 Mn on USD 3.03 Bn of sales and an adjusted operating margin of 8.4%. Management's Q4 guide implies another quarter in that neighborhood, with price actions beginning to offset commodity inflation but a fuller profit catchup deferred into FY26. For FY25, that triangulates to adjusted EPS in the midUSD 1.50s (management had guided USD 1.581.68 in May), and GAAP EPS nearer the lowUSD 1.50s given the onetime loss on the sow operation.

For the next twelve months (which spans the heart of FY26), I model revenue at USD ~12.46 Bn, up ~3% from FY25 midpoint, supported by normalized fill rates in nuts, steady SPAM, improving bacon and pepperoni in Foodservice, and stable international exports. I assume a gross margin recovery to ~16.8% as T&M savings (management reiterated USD 100150 Mn of benefits for FY25, with projects still ramping) and pricing flow through, while SG&A runs ~8.2% of sales as advertising normalizes after a 2024/2025 stepup. That yields operating income of ~USD 1.17 Bn, EBITDA of ~USD 1.42 Bn (adding ~USD 260 Mn depreciation and amortization), interest expense of ~USD 80 Mn on current notes, a 22% tax rate, and diluted shares of ~550 Mn. EPS in that framework is ~USD 1.501.55. At today's enterprise value of ~USD 15.3 Bn (USD 13.1 Bn market cap plus USD 2.23 Bn net debt), the stock would screen at ~10.8x my NTM EBITDA and ~1516x my NTM EPS. None of those multiples look demanding for a lowbeta, branded staples company that has credible cost initiatives underway.

Versus a basket of U.S. food peers, 1011x EBITDA and midteens P/E sits below longrun averages for highquality staples and below Hormel's own historical range when categories are healthy. The valuation gap versus larger diversified peers often closes when the margin trajectory turns and when investors can underwrite midsingle digit organic growth. With brand equities like SPAM, SKIPPY and PLANTERS and a U.S. Foodservice engine that continues to take share through customized solutions, the ingredients for that turn are present once cost pressure abates. The 10K's segment table highlights exactly where leverage lies: Retail volume recovery and Foodservice margin regains.

In the bear case, I hold revenue around USD 12.1 Bn with operating margin slipping to ~8.0% because pork bellies and peanuts stay stubbornly expensive while consumer volumes soften. That implies EBIT ~USD 0.97 Bn, EBITDA ~USD 1.23 Bn, and EPS around USD 1.301.35 on 550 Mn shares. Apply a stressed 14x P/E and add the USD 1.16 dividend, and fair value drifts toward ~USD 20, roughly 15% downside from today.

The base case above gives EBIT ~USD 1.17 Bn, EBITDA ~USD 1.42 Bn and EPS ~USD 1.54; a 17x multiple plus dividend lands near USD 27 for midteens upside.

The bull case assumes 4% revenue growth, a 10% operating margin as T&M rolls off at the high end and category mix skews favorably (planters margin recovery, stronger turkey spreads), and EPS around USD 1.70; an 1819x multiple plus dividend yields the low30s, or ~35% total return. These are not heroic assumptions; they are what you get if the company prints a couple of clean quarters without new plant or commodity disruptions.

Three pieces encourage a long. First, the cost program is real. Management reiterated USD 100150 Mn of incremental benefits in FY25 and pointed to ~90 active projects delivering measurable value across the enterprise, from network rationalization to data/analytics upgrades. The savings are visible in lower logistics expense and process efficiencies and should have carryover into FY26 even if commodity inflation remains sticky.

Second, the transitory drags are rolling off. The Suffolk plant issue is behind them and the company has rebuilt nuts capacity with copackers; USDA peanut price data and landgrant outlooks support a 2025/2026 moderation in sheller costs, which raises the odds that Planters margins expand in 2026 without a new pricing round. Turkey is no longer the 2024 headwind; an objectively tight national flock and elevated wholesale pricing are more conducive to valueadded portfolio management at JennieO than the "compression" period management described earlier in FY25.

Third, the balance sheet and dividend protect the downside. Fixedrate notes with long maturities, an undrawn USD 750 Mn revolver, and net leverage well below 2x EBITDA give management flexibility to keep investing in capacity (USD ~300 Mn of capex guided for FY25) and to keep compounding the dividend. In a world where many staples have to defend bloated advertising budgets or debtheavy balance sheets, Hormel looks conservative.

The acute risk is renewed cost inflation, particularly if pork belly prices stay high into 2026 while retail elasticities finally bite. USDA's hog and pork outlook has been uneven this year, and Foodservice margins are susceptible to mix and raw material moves; the third quarter already showed margin pressure in noncore foodservice businesses despite healthy topline growth. If consumers trade down in snacks and spreads and private label regains share faster than expected, Planters and SKIPPY could see pricemix pressure before lower commodity costs fully flow through.

Regulatory frictionssuch as the ongoing national debate over California's Proposition 12 and crossstate standardsadd uncertainty for pork supply chains, and the broader HPAI path is still a wildcard for turkey. Finally, any reacceleration of plant disruptions like Suffolk would delay the margin story. These are all real risks, but they are also why the stock sits at multiyear relative lows and carries nearly a 5% yield.

I want to see the fourth quarter come in at least in line with the USD 0.380.40 adjusted EPS guide and for management to frame FY26 with explicit operating margin expansion despite ongoing cost caution. I am watching weekly USDA peanut and pork cutout data as a leading indicator for gross margin progression; if peanuts remain benign and the belly complex eases into winter, the case for a firsthalf FY26 margin lift strengthens.

On mix, retail scanner data for Planters and SPAM versus category will be my realtime check on elasticities and promotional intensity. And I want confirmation that T&M savings exit FY25 near the high end of the USD 100150 Mn range, because the compounding of those savings into FY26 is a simple bridge to my base case.

At ~USD 23.8, HRL is ~15x my forward EPS and ~10.8x my forward EBITDAdiscounts that rarely persist if a branded staples portfolio returns to stable margin expansion. Even a mild rerating to 17x on USD 1.54 implies USD 26, and the current dividend of USD 1.16 lifts that to ~USD 27 on a 12month view. My trading plan would be to build the position between USD 2325 with a mental stop in the high teens if we get two more quarters where gross margin fails to improve despite price/mix and cost saves. The asymmetry looks favorable: roughly 15% down to a bearcase USD ~20 versus 1535% upside on base/bull.

This is a classically uncomfortable entry point: strong brands, intact topline, but margins delayed by commodity noise and a couple of selfinflicted operational bruises now fading. The company's own disclosures point to sequential improvement as pricing and cost actions work, the balance sheet is conservative, and the yield pays you to wait. I would go long HRL for the next year, with conviction rising if the fourth quarter and early FY26 confirm gross margin expansion and if management reaffirms that T&M exits FY25 near the high end of the benefit range.