Hormel Foods (HRL) Poised To Beat Q2 Earnings: Here's Why

Hormel Foods Corporation (NYSE:HRL) is scheduled to report second-quarter fiscal 2016 (quarter ended Apr 2016) results before the opening bell on May 18.

Last quarter, the company posted a positive surprise of 16.2%. Encouragingly, the stock beat earnings thrice in the trailing four quarters, and witnessed in line performance once, leading to an average positive surprise of approximately 8.7%.

We believe the company is well on track to score an earnings beat this time around.

Why a Likely Positive Surprise?

Our proven model shows that Hormel Foods is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: Earnings ESP for the company stand at +5.26% as the Most Accurate estimate is pegged at 40 cents while the Zacks Consensus Estimate is lower at 38 cents. Positive ESP is a meaningful and leading indicator of a likely earnings surprise.

Zacks Rank: Hormel Foods carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates.

Conversely, the Sell-rated stocks (Zacks Rank #4 and 5) should not be considered going into an earnings announcement.

The combination of Hormel Foods’ Zacks Rank #3 and a positive ESP makes us confident of an earnings beat in the upcoming report.

Key Factors in the Second Quarter

Hormel Foods’ 5 and 10 rules, business goals that strive to achieve 5% annual top-line and 10% annual bottom-line growth, have acted as key growth catalysts for the company over the past few quarters. The company’s diverse business portfolio, which includes both protein centric and packaged foods, and its dominant presence in the retail and foodservice channels have strongly boosted its financials in the past and are expected to continue to do so.

In addition, the company’s strategies to lower input costs and cost-saving programs have allowed it to reap significant benefits. The company’s recent investments in pork and turkey supply chains are expected to be conducive to second-quarter earnings. As a matter of fact, Hormel Food’s Grocery Products and Specialty Foods division had benefited materially during the first quarter of fiscal 2016 on account of these initiatives. Also, the recent rationalization of Specialty Foods’ “Muscle Milk” production, undertaken under the supply chain management initiatives, is expected to bolster the performance of this segment.

We believe the company’s usual star performers, Refrigerated Foods and Jennie-O Turkey Stores, which have compounded margin growth over the past five years, will continue to propel growth in the quarter to be reported. Especially, the Applegate Farm buyout made last year is expected to boost growth at the Refrigerated Foods segment in the second quarter. Furthermore, the company’s new product innovation and expansion initiatives look promising.

Meanwhile, steady market traction of party trays franchise, Bacon 1 items for the foodservice trade, Muscle Milk Pro Series, REV snack wraps and Wholly Guacamole minis are likely to boost the top line in the quarter to be reported. Moreover, noteworthy exports of both SPAM and SKIPPY brands, which have been consistently boosting the company’s global business, will act as fundamental growth drivers in the fiscal second quarter.

This apart, Turkey production has been stabilizing over the past couple of months despite the outbreak of avian influenza last year, adding to Hormel Foods’ strength. Also, favorable hog and grains production positions the company well for the upcoming release. Also, the company’s value-added marketing tactics and consumer awareness efforts have appealed to the masses and are in turn expected to propel growth.

Other Stocks to Consider

Here are some other companies you may want to consider, as our model shows these also have the right combination of elements to post an earnings beat:

Best Buy Co., Inc. (NYSE:BBY) , which is scheduled to release earnings on May 24, holds a Zacks Rank #2 and an Earnings ESP of +2.94%.

DSW Inc. (NYSE:DSW) , which is slated to release earnings on May 24, carries a Zacks Rank #3 and an Earnings ESP of +2.17%.

PVH Corp. (NYSE:PVH) , which is set to release earnings on May 25, carries a Zacks Rank #3 and an Earnings ESP of +1.40%.