Hormel Foods

Hormel announced it's acquiring privately held Brakebush Brothers, a value-added chicken company primarily focused on the foodservice channel (90% of sales). It will pay $1.055 billion, financed through debt and cash on hand, and is expected to close in the first fiscal quarter of 2027.

Why it matters: Given challenges in the retail segment (60% of sales), which saw high-single-digit volume decline in the fiscal third quarter, the acquisition adds to the better-performing foodservice segment (33% of sales, preacquisition), which has been less affected by consumer headwinds. We think the deal makes strategic sense. It adds diversification, increasing the share of chicken, the fastest-growing protein, to 13% of sales from 5%. Moreover, Brakebush is not vertically integrated and largely passes cost inflation onto customers, minimizing commodity exposure. Financially, we think Hormel paid a good price at 10.7 times EBITDA before synergies. The target for $20 million of synergies looks achievable at just 2% of our estimate of Brakebush's cost; including synergies, it brings the price paid down to an attractive 8.7 times EBITDA.

The bottom line: We have lowered our fair value estimate to $26.50 from $28.00 for narrow-moat Hormel. This includes a $0.50 increase from the acquisition offset by a $2 reduction from a lower sales and margin outlook from consumer pressure after fiscal third-quarter results. Shares rose a low-single-digit percentage after the news on Sept. 30, while most packaged food names were down a low-single-digit percentage, as we think the market views the deal favorably. Still, shares remain undervalued as we think the market remains concerned about near-term consumer headwinds.

Key stats: Management expects leverage to creep above its 1.5 to 2 times net debt/EBITDA target immediately after closing the deal, but expects it to return within range by the end of fiscal 2027, which we view as achievable.

After updating our forecasts for the company's fiscal third-quarter 2026 results and the pending acquisition of Brakebush Brothers, we've lowered our fair value estimate to $26.50 per share from $28. This includes a $0.50 increase from the acquisition, offset by a $2 reduction from a lower sales and margin outlook due to consumer pressure after fiscal third-quarter results.

Our fair value estimate implies a 17 times price/fiscal 2027 EPS multiple and an enterprise value/fiscal 2027 adjusted EBITDA of 11 times.

Hormel posted an organic sales decline of 2% and adjusted EPS growth of 6% in the third quarter of fiscal 2026. Organic sales declines in retail and international of 3% and 4%, respectively, offset foodservice's 2% growth. Adjusted operating margin expanded 60 basis points to 9%.

For fiscal 2026, we forecast the companywide top line to be roughly flat, amid lower volumes and the sale of the commodity turkey business offset by higher prices. We forecast the acquisition of Brakebush to close in fiscal 2027, adding about $1.1 billion in sales. Long-term, we forecast price and volume growth to return to low single digits. Through fiscal 2030, we forecast average annual sales growth of 3%, including the acquisition.

At the segment level, we forecast the fastest-growing segment to be international, at 2.4% per year on average over our forecast period, primarily due to a smaller base. With most of Hormel’s business based in the US, we think it’ll take increased investment, or more likely an acquisition, to make international a bigger driver of companywide results. We forecast average annual organic revenue growth of 2.1% for foodservice through our forecast period, given meaningful market potential in this relatively untapped area for Hormel. We model retail sales to decline roughly 30 basis points through 2030, as near-term volume declines outweigh an eventual return to low-single-digit growth.

From a profitability standpoint, we forecast retail segment profit margins of 6% by fiscal 2030, foodservice margins of 13%, and international margins of 8%. This leads adjusted operating margins (as defined by the company) to recover to about 9% by fiscal 2030 (a 70-basis-point improvement from fiscal 2025), at the lower end of historical levels, as volumes normalize, price increases slow, and cost inflation eases.

Selling, general, and administrative expenses have averaged about 7%-9% of sales over several years, and we forecast they will remain at about 8%. This includes 130 and 30 basis points for advertising and R&D, respectively, in line with historical levels.

We incorporate one ESG risk based on the social impact of its products within our forecast. We think changes in consumer preferences related to healthiness are more than likely, especially in the US, where Hormel generates most of its revenue. This will lead to modest long-term growth for pork and red-meat products. Partially offsetting this negative effect, Jennie-O’s turkey focus should benefit from health switching. Overall, these anchor our expectation of low-single-digit volume growth for most of Hormel’s businesses.

We assign Hormel Foods a narrow economic moat rating based on intangible assets stemming from its strong brands and entrenched relationships with retailers and foodservice companies. Leading brands include Spam (claiming the top spot with 48% market share in the $2.5 billion US shelf stable meat market versus just 9% share for private label, according to Euromonitor), Applegate Farms and Jennie-O (number three and number five brands, respectively, with a combined 5% share in the $7.8 billion chilled processed poultry market dwarfed by the 14% share for private label), Skippy (number two with 13% market share in the $3.2 billion nut- and seed-based spreads market compared with the 21% share held by private label), and Planters (which boasts leading branded share at 14% in the $9.6 billion nuts, seeds, and trail mixes market, though this is eclipsed by the 37% share private label has amassed).

The moat is evident through its returns on invested capital, including goodwill, which consistently exceed our estimate of its cost of capital. Even in 2021 and 2022, when avian flu struck and input costs rose before the company could adjust its prices, it still earned roughly double-digit returns. We expect economic returns to revert to 8%, below the 20% range the company has historically earned but still well above our estimate of its cost of capital of less than 6%.

As anecdotal evidence, we conducted channel checks to gauge potential pricing power. As of 2025, Spam sells for 30% or more, higher than private label. Planters peanuts sell for 20% or higher (likely capturing the premium end of the market given its high price and lower market share than private label), and Skippy peanut butter sells for 40% or higher. Admittedly, this isn’t perfect evidence of pricing power, but we think it indicates willingness to pay higher prices among end customers.

Hormel’s continued transformation to a branded food firm, as it has deprioritized commoditized fresh meat, has enhanced its moat. Without brand differentiation, raw meat producers are often price takers, more exposed to commodity price fluctuations and broader supply/demand dynamics, as consumers tend to choose based on price rather than brand. In comparison, food producers with established brands command pricing power with their customers. As evidence, Hormel generates high-teens gross margin at midcycle, compared with high-single-digit gross margins for commoditized meat producers and midteens for private-label food companies.

Hormel’s relationships with retailers and foodservice operators are another key intangible asset. Backed by leading brands in several categories and an established distribution network, Hormel secures in-store placement despite shelf-space limitations and ranks at the top of online searches and pages. This matters because it helps Hormel launch new product innovations (which in turn drive excitement and strengthen retailer relationships) and expand distribution of acquired brands across its national footprint—breadth that a new entrant doesn’t have or would have to pay to access. The importance of distribution can’t be understated—it’s costly, time-consuming, and difficult to recreate these relationships in the fragmented retail channel. Arguably, the frequent acquisition of smaller, emerging brands shows how hard it is to replicate that scale.

Similarly, Hormel can leverage its relationships with foodservice operators to launch products that fit their changing needs. For example, fiscal 2022 foodservice sales grew nearly 20% as Hormel offered foods that required less preparation, given customers’ labor shortages. Existing relationships put the company in a position to quickly gather insights and sell corresponding products widely. Moreover, these operators are willing to pay for these innovations, as evidenced by the higher margins Hormel earns in this segment.

Although Hormel’s dedicated salesforce provides some benefits, we don’t think it is a competitive advantage. Competitors Tyson and Smithfield Foods forgo their own salesforce in favor of brokers. Hormel argues that its dedicated salesforce lets it see firsthand the challenges clients face, providing unique insights that drive innovative products to meet those needs. Additionally, the company believes it fosters stronger relationships with clients and distributors. Although some may argue it has helped Hormel’s success in the foodservice industry, we don’t think this is an inimitable competitive advantage. Even though Tyson and Smithfield currently appear to have no plans to launch their own salesforce, we think capital is probably the largest roadblock if they were to switch strategies.

We refrain from assigning Hormel a wide moat because of uncertainty about both its competitiveness and the food landscape beyond 10 years. Given the highly competitive food industry, we cite a few reasons supporting our assessment. First, Hormel’s strongest brands still tend to be tied to its historical meat focus. Although its expansion into other categories is reducing its exposure to categories where pricing power remains elusive, it hasn’t made enough progress to establish the multicategory leadership we see in other wide-moat food names like Campbell's. Second, its strongest brands don’t have the far-away dominance that wide-moat Hershey does in chocolate, for example. Third, unlike wide-moat Mondelez, Hormel’s strength is exclusively tied to its home US market. Demonstrable brand power across many markets would give us more comfort in the staying power of its competitive advantages. Lastly, we don’t see additional moat sources to strengthen Hormel’s overall moat, as we don’t see benefits from scale in either purchasing or production.

Its protein-centric portfolio should appeal to health-conscious consumers even as GLP-1 drugs reduce US obesity rates.

Not only will Hormel continue growing its dividend, but by filling its coffers with more cash, the firm could also fund a special dividend, share repurchases, or acquisitions in the medium term.

The acquisition of Brakebush adds protein diversification and expands the attractive foodservice segment at a good price.

Food is a competitive space (from other large manufacturers and smaller niche operators), and if Hormel ratchets back spending behind innovation and advertising, market share could erode.

Hormel faces commodity price exposure through both costs and selling prices. Hormel may not be able to always pass on costs to the end customer with higher prices without realizing volume degradation.

Hormel can fall behind changing customer tastes and face increased competition from fast-moving startups. This could also increase promotional spending, hurting sales and profitability.