Hormel Foods (HRL)

Total return at 5 years: 16.0%/year = 10.7% appreciation + 5.3% dividend. The target price ($32) is ex-dividend; the $6 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $37 · Multiples $31) exceeds the market price ($19).

Today — with margin of safety: at $19 trades ~38.1% below its value discounted to today (~$31) — the wide discount we require (≥38%, equivalent to a ~15% annual return); the risk is covered by the margin, not the rate.

At 5 years — Muy infravalorado: the target price ($32) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years comfortably exceeds the risk-free rate (4.5%) — and the discount reaches the required margin of safety.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($19) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-10.5%/year) than we project (3.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$0.5 bn of owner earnings in year 5 (vs ~$0.9 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on P/E. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year-0 is the trailing twelve months ended July 26, 2026, built by levels from the third-quarter fiscal 2026 release (8-K dated August 27, 2026): net sales of $12,147 million, GAAP operating income of $574 million, and GAAP net income attributable of $343 million. That GAAP result does not describe the underlying trajectory of the business, and the company itself publishes the reconciliation that separates it out: in the quarter it carried the loss on the sale of the Brazil operations (the Ceratti brand, classified as held for sale and closed at the start of the fourth quarter), a non-cash impairment on a minority stake in Indonesia, and a litigation settlement, on top of the ongoing transformation initiative. Unlike the prior pass — which normalized on a proprietary base that could not be reproduced from the release — here year-0 is built from the adjusted series the company reconciles line by line: adjusted operating income of $807 million in the first nine months versus $773 million a year earlier, and adjusted earnings per share of $1.11 versus $1.05. Chained with fiscal 2025 — whose adjusted level is backed out from the guidance itself, which states 6% to 10% growth on that base — the trailing twelve months come out to $1,053 million of adjusted operating income (8.67% margin) and $785 million of adjusted earnings (6.46% margin), or $1.43 per share. Year 1 anchors on the raised guidance from the same release: net sales of $12,100 to $12,200 million with organic growth of 1% to 2%, adjusted operating income of $1,080 to $1,120 million (growing 6% to 10%), and adjusted earnings per share of $1.45 to $1.51 (raised from $1.43-1.51, growing 6% to 10%). On the rolling window that leaves revenue growth of just 1.1% — sales guidance was lowered during the quarter, from $12,200-12,500 million to $12,100-12,200 million, on the Brazil divestiture and lower commodity pricing, while earnings guidance was raised — and adjusted earnings 9.3% above year-0. This is the case where the guidance's two anchors pull in opposite directions and both have to be read: taking only the revenue anchor would have lowered the level and left margin calibrated against a larger revenue base. The path accelerates gradually toward 3.0% revenue growth by year 5, at the low end of the staples band, and the adjusted net margin recovers from 6.46% to 7.78% as commodity inflation moderates and the transformation initiative delivers savings, without returning to the fiscal 2022 peak. The 16x exit multiple sits at the floor of the staples band (16 to 22 times): the moat is narrow and eroding, return on invested capital (8.4%) sits below the 10% bar, and terminal growth is low single digits, so none of the premium captured by category leaders is warranted. The metric is P/E on adjusted earnings, at the equity level: starting cash and debt are set to zero in the model because the cost of funding is already embedded in interest expense. The company does not buy back stock: it returns cash exclusively via dividend ($641 million paid over the trailing twelve months), which operating cash flow comfortably funds.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $32 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $19, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $32 in 5 years plus $6 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $31. Against the current market price ($19), the margin of safety is 38.1% (trades below the maximum → there is margin) and the total return at that price would be 16.0% annually.

• Current multiple elevated by depressed earnings. Market P/E on reported trailing twelve-month earnings looks high because those earnings are distorted by non-recurring charges.
• Attractive dividend yield. Current dividend yield approximates 4.6%, with 389 consecutive quarters of payment.
• Total return in fair value zone. Estimated five-year total return combines modest appreciation and the dividend.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (101%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital below the bar. Normalized ROIC falls below 10% after fiscal 2025 margin compression.
• Stable cash generation. Operating cash flow remained positive and funded full dividend without recourse to additional debt.
• Recurring intangible impairments. US$235 million of non-cash impairments in 2025 signal pressure on brand value.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Hormel's growth breaks down into volume (pounds sold) by price and mix within each segment. In the third quarter of fiscal 2026 organic revenue fell 2%: Retail was down 3% organic, International down 4%, and Foodservice was the only one that grew, at 2%, extending the company's longest organic growth streak. The quarter's revenue decline combines portfolio-reshaping actions, lower pricing in the commodity-linked parts of the business, and a consumer under pressure, per the company's own description.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (26-jul-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Organic growth recovering. Sixth consecutive quarter of organic revenue growth after two years of decline.
• Volume still declining. Consolidated volume declined 2.3% in fiscal 2025, offset only partially by price and mix.
• 2026 guidance reaffirms recovery. Company reaffirmed revenue of US$12,200-US$12,500 million and adjusted earnings growth of 4% to 10%.

• Diversified brand portfolio. Over 30 recognized brands (SPAM, Skippy, Planters, Jennie-O) reduce dependence on a single category.
• Elevated customer concentration. Walmart concentrates 15.6% of gross sales and the five largest customers approximately 38%.
• Exposure to volatile inputs. Cost of pork, turkey, beef and nuts compressed gross margin from 17.0% to 15.6% in the year.
• Foodservice in sustained expansion. Eleven consecutive quarters of organic growth, the segment with strongest recent performance.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• ✓Interest coverage (EBIT / interest)13.4x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 101% of ROIC
• ✕Value creation (ROIC − 10% bar)-2pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.1x
• –Float / working capitalNeutral WC
• ✓Dilution (SBC % of revenue + shares)SBC 0.2% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Conservative leverage. Total debt of ~US$2,860 million versus equity of ~US$7,950 million.
• Solid liquidity. Cash and short-term investments of ~US$860 million, increasing versus prior year-end.
• Wide interest coverage. Normalized EBIT covers annualized interest expense (~US$79 million) several times over.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Interim CEO. Jeffrey Ettinger serves as interim president and chief executive since July 2025; no permanent CEO designated in filing.
• Foundation control. The Hormel Foundation owns 46.6% of shares and exercises effective long-term control.
• Low direct management ownership. Directors and executives as a group own only 0.58% of outstanding shares.

• A year marked by charges that sink GAAP earnings without touching value: the loss on the Brazil divestiture, an impairment on a minority stake in Indonesia, and a litigation settlement leave trailing-twelve-month GAAP earnings at $343 million versus $785 million of adjusted earnings.
• Recovery punished in excess: two consecutive years of revenue decline generated skepticism that still hasn't priced in that the company raised its adjusted earnings-per-share guidance during the quarter.
• Absence of share buybacks to support the price, unlike sector peers that return capital through that channel in addition to the dividend.

The market multiple calculated on trailing-twelve-month GAAP earnings looks elevated precisely because that earnings figure is distorted by non-recurring charges, not because the market is paying a genuine quality premium. What this valuation does charge for is that the top line isn't cooperating: organic revenue fell 2% in the quarter and sales guidance was lowered, so the recovery rests entirely on margin.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +4%/year (+21% total): the margin of safety protects the downside. The bull (+22%/year, +167% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Animal diseases. Outbreaks of highly pathogenic avian influenza in the turkey supply chain during 2024 and 2025 threaten production volume.
• Private label substitution. Filing acknowledges consumer shift toward generic and lower-priced products.
• GLP-1 medications. Company cites these drugs as a factor that could reduce processed protein demand.
• Regulatory and foreign trade risk. Exposure to tariffs and trade policies given international business and SPAM exports to China.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: narrow moat, eroding.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 3% at a PEG of 4.5 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 10% (EBIT/EV) + ROIC 8% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -11% vs our 3%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -3%/yr, bull-scenario ceiling +17%/yr over 5y and a +38% margin → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, eroding; sources: intangibles, efficient scale, cost advantage → fails the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -11%, within what we project (3%) — the story squares with the numbers.