Hormel Foods Refines Portfolio, Completes CytoSport Sale

Hormel Foods Corporation (NYSE:HRL) completes the divestiture of CytoSport business to PepsiCo, Inc. (NASDAQ:PEP) . The deal, announced in Feb, 2019, was valued at almost $465 million. Let’s take a closer look.

Is CytoSport Sale a Prudent Move?

As a result of this transaction, renowned brands such as Evolve and Muscle Milk no longer form part of Hormel Foods’ business. We note that management had earlier announced that the performance of CytoSport business was unimpressive during fiscal 2018. Declines in the single serve ready-to-drink product lines and powder products had impaired growth of the category. Intense competition and inadequate distribution were other deterrents. These adversities might have led the company to divest the business. Such efforts are likely to enable the company to focus on other areas with substantial growth potential.

Further, management expects that Pepsi’s strong expertise in the beverages space makes it an appropriate option to include CytoSport business brands. Moreover, Pepsi has been the distribution partner for Muscle Milk for long and holds substantial experience in marketing products in the sports nutrition category. These factors are likely to boost the CytoSport business.

Hormel Foods has not made statements of the divestitures’ material impact on the top line in fiscal 2019.

Wrapping Up

Hormel Foods has undertaken business divestitures in the past as well. The company sold the Fremont processing facility to WholeStone Farms in December 2018. Tough dynamics in the pork industry have compelled the company to resort to the divestiture. In fact, higher tariffs have weighed on fresh pork export volumes, sales and profits at Hormel Foods’ International division. Such headwinds combined with weakness in the turkey segment are impacting investors’ sentiments, evident from the stock’s 4.7% decline in the past three months, against the industry’s rise of 9.5%.

Nevertheless, this Zacks Rank #3 (Hold) company focuses on making strategic advertisement investments to support growth of brands and launch products that are in line with consumers’ preferences. Moreover, the company resorts to prudent buyouts. To this end, the Columbus and Fontanini buyouts are driving performance in the Refrigerated Foods segment. Also, the Ceratti acquisition is supporting growth in the International segment.

We expect these factors, combined with management’s efforts to refine the portfolio, to cushion the aforementioned hurdles and boost investors’ sentiments in the forthcoming periods.

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