Consumer

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Hormel Foods' "My Pepperona" commercial is one of the most annoying ads of the year, and perhaps ever. But shareholders of the $23 billion company can't complain. The stock has been one of the best food investments over the past six months because Hormel is figuring out what most other food giants have struggled with, and that's how to target younger consumers.  

Out Front
These North American food stocks have posted the biggest gains and losses over the past six months.
Source: Bloomberg
At least $1 billion in market value

Millennials have been quickly transforming the food industry over the past few years. They want fresher foods that also require little preparation. In other words, laziness that one can feel good about. They're turned off by canned products, light up when a package says "organic," love their microwaves and apparently have a strange obsession with bacon. 

That explains why Hormel has been strategically building out its refrigerated-food offerings, such as meats and side dishes, and downplaying products like Spam canned ham. In July, the company completed its biggest acquisition ever -- a $775 million deal for Applegate Farms, which makes sausages and deli meats that don't contain antibiotics or hormones. It was a smart move that's already begun to pay off. On Tuesday, Hormel raised its 2016 profit forecast by about 5 percent, citing the success with refrigerated foods, and its shares rose to a new record.

Finding Growth
These are consensus revenue growth estimates for the next three calendar years for Hormel versus North American packaged-food companies valued at more than $1 billion.
Source: Bloomberg

It highlights the value of smaller brands that are emerging in the fresh and natural foods segment. Earlier this month, I wrote about WhiteWave Foods, the maker of Silk almond milk, being one of the industry's most attractive takeover candidates because of its growing share of the plant-based dairy market. There was also Pinnacle Foods' $975 million takeover of Boulder Brands last year to expand in better-for-you snacks and frozen foods, and General Mills' $810 million acquisition of Annie's organic macaroni and cheese in 2014.

Hormel Chief Executive Jeff Ettinger, speaking at an investor conference Tuesday, said that there has been a shift in the company's "mentality toward acquisitions" and that it's looking for somewhat larger deals than it had in the past because it needs assets that can move the needle. Already, four of Hormel's five biggest transactions were during the past four years, he said, citing Wholly Guacamole, Skippy peanut butter, Muscle Milk and Applegate Farms. And now, he wants to increase revenue by 5 percent per year and expand operating income by 10 percent. 

Hormel has deep enough pockets to buy more brands, with cash totaling about $375 million. The company also generated five times more Ebitda in the past 12 months than it owes lenders, giving Hormel one of the industry's lowest leverage ratios -- an advantageous position when it comes to deals in a space that's becoming increasingly competitive. Hormel is also planning to sell a portion of its Diamond Crystal sweetener business because it's no longer a good fit. The unit has about $250 million in revenue, and the proceeds from selling it could go toward acquisitions.

Deal Appetite
Last year's record is a bit deceiving given that the Kraft-Heinz merger accounted for a third of the volume. A wave of smaller deals is probably coming as the traditional food giants become starved for growth.
Source: Bloomberg

Kellogg, Mondelez, Campbell Soup, etc. need to start thinking like Hormel: Targeted acquisitions of brands that are catching on among millennial shoppers, for whom fresher and seemingly healthier stuff is becoming the norm. Cereal, overly processed foods and canned items just aren't cutting it anymore. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net