Hormel Foods stock (NYSE: HRL) popped as much as 16% this week, according to data from S&P Global Market Intelligence. The company -- which owns snack food and protein brands -- beat earnings expectations for the last quarter and provided guidance that investors liked. Shares of Hormel Foods are still off close to 40% from all-time highs due to fears over weight loss drugs and their effects on food demand in the coming years.
Here's why Hormel Foods stock popped this week.
Beating earnings, but declining volumes
Last quarter, Hormel Foods beat earnings expectations, posting adjusted earnings per share (EPS) of $0.41 for the three months ending in January 2024. However, it is showing meager growth, with net sales up just 1% year over year and product volumes actually down 4% from a year earlier. Hormel owns brands like Planters and Corn Nuts, with a focus on protein-heavy snack food brands.
Investors were likely pleased with guidance this fiscal year. Management is expecting adjusted EPS of $1.51-$1.65 for the full year, which would give the stock a forward price-to-earnings ratio (P/E) of 20 if it can hit the high end of this guidance. This is below the market average, and indicates that Hormel Foods may be undervalued at the moment.
Will weight loss drugs kill this business?
Hormel Foods and its peers have gotten beaten up due to the revolutionary weight loss drugs now available from the pharmaceutical giants. With studies and reports indicating less spending on food from people who use these drugs, as more and more people in wealthier countries start taking them, investors are worried about Hormel. The company's management doesn't seem too worried about these drugs, claiming that their products are more protein-focused, while the drugs work by getting people to consume less fatty and sugary foods.
Hormel might be correct that it won't be as impacted compared to companies like Hershey or PepsiCo. But investors shouldn't shrug away the growth of new drugs such as Ozempic.
Indeed, 40% of the United States population is obese. This number has been growing, which means that -- on average -- people are eating more food than they need to, including Hormel products. If more and more people get their obesity cured by taking weight loss drugs, it is hard to imagine a world where demand for Hormel products skyrockets.
Sure, Hormel will probably be able to keep raising prices at or above inflation to counteract volume stagnation. But these weight loss drugs can and likely will be a real headwind for all packaged food companies. At a forward P/E of 20, Hormel stock doesn't look dirt cheap right now.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends Hershey. The Motley Fool has a disclosure policy.
