Shares of Hormel Foods (HRL) are under pressure after JPMorgan analyst Thomas Palmer downgraded the stock to Underweight as he believes rising pork costs and worsening Jennie-O ground turkey brand distribution points could weigh on the company's earnings. Meanwhile, his peer at Goldman Sachs also cut his rating on the stock to Sell as he expects an inflationary U.S. pork market to present margin headwinds for the packaged meats producer.
RISING PORK COSTS: In a research note to investors on Tuesday, JPMorgan's Thomas Palmer downgraded Hormel Foods to Underweight from Neutral and lowered his price target on the shares to $36 from $40. Rising pork costs and worsening Jennie-O ground turkey brand distribution points could weigh on Hormel's earnings, the analyst contended. With the African swine fever in China potentially resulting in an extended period of elevated pork pricing in the U.S., Palmer pointed out that Hormel is heavily reliant upon pork as an input for its products and he does not think the company will be able to fully offset these cost increases through pricing. Additionally, the analyst told investors that he believes Hormel is likely to reduce prices on Skippy peanut butter in response to industry leader Smucker's (SJM) price reduction on Jif.
RISK TO PREMIUM VALUATION: Goldman Sachs analyst Adam Samuelson also downgraded Hormel Foods to Sell from Neutral and cut his price target on the shares to $35 from $37. Following its early August 2018 initial outbreak, the analyst is increasingly convinced that the breadth and depth of the African swine fever impact across the Chinese pork industry, and as a result the global protein industry, will be significant in the near-to-medium-term. Samuelson told investors that he expects an inflationary U.S. pork market to present margin headwinds for Hormel. With his estimates now below consensus and limited earnings growth forecasted over fiscal years 2019-2020, he sees risk to Hormel's premium valuation. The analyst noted that Buy-rated Tyson Foods (TSN) and BRF S.A. (BRFS) remain his preferred way to gain exposure to the Global Protein market. Meanwhile, Samuelson upgraded Sanderson Farms (SAFM) to Neutral from Sell, while raising his price target on the shares for $131 from $81, as higher competing protein prices and improving U.S. export prospects "make a more negative stance unsustainable." He raised his fiscal 2020 and 2021 margin forecasts for the company to "normalized levels." However, further upside is tempered, for now, by increases in U.S. processing capacity coming on stream over the next 18 months, the analyst contended.
PRICE ACTION: In late morning trading, shares of Hormel Foods have dropped almost 3% to $39.28.