Investors who’ve shied away from Hormel (NYSE: HRL) may want to take a 2nd look. The Q1 results and guidance for 2023 have sparked a pullback in prices that should result in another stunning rebound. This stock is trading at a 2-year low which marks the bottom of the post-pandemic trading range. At these levels, it trades consistently with the pre-pandemic share price while the business is larger, the share count is lower, and the dividend is greater. 

The stock trades below the long-term uptrend line and is in danger of breaking the trend, but that’s an unlikely event. Hormel is among the best-run consumer staples companies on the planet; it pays a healthy dividend and trades at a more reasonable valuation. The more likely scenario is that investors will step in to scoop up the bargain, and it already looks like they are. Whether this stock will return to its uptrend or a new trading range has been entered. 

Hormel Plunges On Trimmed Profit Guidance 

Hormel had a mixed quarter, but the guidance got the market’s attention. The company is guiding for growth slightly below the consensus estimate and for margin pressure to increase before it gets better. The good news within the report is that near-term margin pressure includes costs associated with improving margin later in the year.

These costs aim to reduce inventory and cut back on warehousing expenses which are on the rise given the high-inventory environment reported across the retail and wholesale universes. The upshot is that earnings should improve by Q3 and may get a lift if the FOMC can make headway with inflation. 

“We are taking immediate action to combat inventory levels and warehousing costs. These actions are expected to result in short-term margin compression. Second, we will execute strategies to drive improvement for our Planters® business and the snack nuts category … Third, we will continue to implement our new operating model, GoFWD, including capturing the synergies from fully integrating our Jennie-O Turkey Store business ... Our new operating model should better enable improved business performance as the year progresses."

The Q1 results are weaker than expected, which is surprising given reports from other consumer staples companies. The revenue of $3 billion is down surprisingly by 1.3% YOY and missed by 250 basis points. The decline is due to volume decline in all segments there were only partially offset by higher prices.

On a segment basis, International was the weakest, with net growth of -8% and a double-digit decline in operating profit. The Foodservice segment is noteworthy because it is the one area of strength and showed a slight improvement in segment earnings. 

Hormel’s Dividend Is In No Danger 

Hormel’s dividend payment is in no danger in 2023. The company’s earnings guidance is light but sufficient to cover the dividend. The balance sheet remains strong with low leverage. The cash balance is down compared to last year but offset by investments and receivables from affiliates. The following dividend increases may not be as high as the 8% CAGR the stock is running, but they are still expected. 

The analyst may surprise by upgrading the stock given the pullback in price action. The analyst activity has been light over the last year, Marketbeat is only tracking 6 reports less than a year old, but the trend is positive. The group sees a 15% upside compared to the current price action, which is trending higher. Even without an upgrade a reaffirmed Buy or Hold rating would go a long way toward supporting the market. Until then, it looks like this stock will test support vigorously with a chance of rebounding higher.