As Spam turns 75, Hormel could use some spice

Rising commodity prices are hurting the food industry.

By Jonathan Berr Jul 6, 2012 1:36PM

Hormel (HRL) is celebrating the 75th anniversary of Spam in style, with an official T-shirt, among other things. But shareholders may not want to stick around for the party that's being "hosted" by the company's Sir Can-A-Lot icon.

Shares of the pork and beef processor are up more than 3% this year, thanks to better-than-expected quarterly earnings spurred by strong sales of its iconic product. But the stock may have gotten ahead of itself. Analysts have an average 52-week price target of $29.13 -- slightly below where it trades now. It has a price-to-earnings ratio of 17.35, the highest level in five years, according to Reuters.

Rising commodity prices are challenging the Austin, Minn., company and other food manufacturers. Corn prices have skryrocketed more than 30% over the past two weeks, nearing their 2008 high. Hog and cattle prices are also surging. Commodity prices may soar even higher as crops wither in the fields under hotter-than-expected summer weather. Consumer confidence remains shaky as the economy continues to meander, as evidenced by Friday's tepid jobs report.

Hormel's growth prospects appear to be restrained. Revenue in the current quarter is expected to rise about 5%. The company's yearly guidance of $1.79 to $1.89 may be overly ambitious, especially as food prices continue to rise. Analysts expect fiscal-year earnings of $1.85 a share.

Further complicating the picture is speculation around Hillshire Brands (HSH) -- the maker of Jimmy Dean sausages, Hillshire Farms lunch meats, and Ball Park hot dogs -- formerly known as Sara Lee. Bernstein analyst Alexa Howard wrote in a note to clients that Hillshire is a takeover target and Hormel may be one of its suitors, according to Reuters.

If the economy continues to falter, that's good news for Spam, which is cheap enough to find a place in the most-stretched food budgets. The canned meat remains popular in Hawaii and parts of Asia. The turkey business should also do well as consumers opt for a lower-calorie alternative to beef. Hormel, though, may be pressured to discount its products to attract cash-strapped customers, which will squeeze profit margins. Of course, that's good news for consumers, who may be tempted to try Apple Spam Turnovers and similar treats.

Investors should avoid food stocks for now, as the risks far outweigh the potential rewards.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter@jdberr.

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