Hormel (HRL) Update

Hormel closed out the year on solid footing, leaning into its industry-leading protein-centric portfolio to deliver the 4th straight quarter of organic sales growth, up 2% for Q4 and the full year—something very few consumer staples names can say in this environment.

2025 threw a gauntlet of headwinds at Hormel: steep commodity inflation with record-high beef costs throughout the year, pork inputs up over 20%, elevated nut prices, a ~5M pound chicken recall in food-service, a fire at the Skippy peanut butter facility, and nagging avian flu impacts on turkey and chicken. All of these pressures weighed heavily on margins all year and led to bottom-line results below initial expectations, with adjusted EPS coming in at $1.37 versus prior midpoint guidance of $1.65.

The good news is that the worst is now firmly in the rear-view, with 2026 shaping up to be a strong recovery year as cost savings and pricing actions flow through and the company laps many of these one-off headwinds. For the full year, management is guiding net sales of $12.2-$12.5B (organic growth of +1-4%), adjusted operating income of $1.06-$1.12B, up 4-10%, implying margins of ~8.8%.

What’s even more encouraging is that this margin recovery bakes in meaningfully higher marketing spend, which should help deliver further top-line acceleration for the protein powerhouse.

Perhaps the biggest catalyst for the recovery is the Planters turnaround. After a shaky start since the $3.35B acquisition in 2021 bogged down by supply disruptions and integration headaches, the brand seems to be hitting its stride and returning to growth mode. Planters delivered a strong sequential recovery throughout 2025, ending the year with sales up 12% and distribution fully recovered and up 13% YoY, setting up a long runway for growth in 2026.

Despite this clear progress, the market remains overly pessimistic, heavily discounting Hormel’s recovery and doubting a turnaround at a 135-year-old company with leading brands spanning more than 40 categories.

We’re happy to take the other side of that trade. Trading at its cheapest valuation in well over a decade, combined with the higher volatility typical of mid-term election years and a strong historical track record of staples out-performance in those periods, Hormel is exactly the type of high-quality compounder we want exposure to. Until the market comes around, we’re paid handsomely to wait with a ~5.2% dividend yield—a payout that has increased for 60 straight years. We’ll keep sleeping like a baby at night holding this longtime dividend aristocrat.

Q4 Earnings Breakdown

10 Key Points

1) Hormel delivered its fourth consecutive quarter of organic sales growth in Q4 at 2%, bringing full year organic growth to 2%. During FY2025, organic sales increased 1% in Retail, 5% in the all important, high margin Food-service segment, and 1% internationally.

2) Planters is fully back in growth mode, with the brand returning to double digit growth in Q4 as dollar consumption rose 12% and volume consumption increased 6%. The distribution recovery, which had been impacted by last year’s plant shutdown, is now complete, with distribution up 13% YoY. Management remains bullish on the Planters brand and expects momentum to carry into 2026, supported by stepped up advertising and continued share gains in the growing snack nut category.

3) The Transform and Modernize initiative ended the year delivering benefits within the previously stated $100 to $150M run rate savings, with more than 120 projects contributing value in 2025. The program was designed to generate gross savings of 2-3x the cost to implement with a payback period of less than 12 months, which has now been achieved. In addition to the T&M initiative, management conducted a comprehensive review of administrative expenses at the end of FY2025 and announced plans to reduce ~250 corporate and sales roles, or ~9% of the group, driving additional cost savings.

4) Margins remained under pressure in Q4, with adjusted operating margins of 7.7%, bringing full year margins to 8.4% compared to 9.6% last year. Profitability was weighed down by sharp increases in commodity costs (pork, turkey, beef, nuts), avian illness across the turkey supply chain, and isolated operational issues including the chicken product recall and a manufacturing facility fire. To offset these pressures, management implemented two rounds of pricing actions across a broad set of products in the summer and fall of 2025, which are beginning to flow through and are expected to support both gross and operating margin expansion in 2026.

5) Hormel announced a 1% dividend increase to $1.17 per share, marking its 60th consecutive year of uninterrupted dividend growth and its 389th straight quarterly dividend. Management paid a record $633M in dividends during 2025, with the current yield at 5.24% and a 5 year dividend CAGR of 4%.

6) Management guided to a recovery year in 2026 with profitable growth, calling for net sales of $12.2-$12.5B and organic sales growth of 1-4%. EPS is expected to be $1.43-$1.51, representing 4-10% growth from this year’s $1.37. Margins are projected to recover, with adjusted operating income of $1.06-$1.12B, up 4-10%, implying margins of ~8.8%. This outlook keeps Hormel within its long term target of 2-3% net sales growth and 5-7% operating income growth.

7) Raw material cost inflation jumped more than 500 basis points in Q4, driven by sharp increases in pork inputs, with pork bellies up ~25%, pork cutout up ~10%, and pork trim up ~20% for the full year. Management expects modest improvement across most commodity markets in the second half of 2026, though all major inputs are expected to remain above historical 5 year averages.

8) Management spent $148M on advertising and marketing in 2025, down from $163M in the prior year, and plans a meaningful step up in 2026 to further support top line growth. Management continues to expect margin expansion even as cost savings are reinvested into marketing, while leveraging AI to boost efficiency and unlock creativity across brand marketing. In Q4, the Skippy team used generative AI to produce more than 25 high quality, seasonally relevant pieces of content in a single day. AKA Hormel is an AI beneficiary, not an AI cost center…

9) Operating cash flow totaled $323M in Q4, bringing full year cash flow from operations to $845M. Hormel’s balance sheet remains sound, with $617M of cash on hand and total long term debt, including current maturities, of $2.9B.

10) Capex for the full year totaled $311M, or ~2.6% of sales, with investment directed toward high priority capacity expansions for Hormel Fire Braised and Applegate, as well as capital deployed at the China facility to support continued growth. For FY2026, management expects total capex of $260 to $290M.

Earnings Call Highlights

Morningstar Analyst Note

Diageo Update

Diageo kicked off FY2026 with a softer-than-hoped Q1 as the international spirits heavyweight continues navigating the post-boom alcohol reset.

Organic net sales came in flat, with +2.9% volume growth largely offset by -2.8% price/mix. This beat the 1.3% decline feared by analysts but failed to show the early signs of sequential improvement into the back half that management had been looking for, prompting a full-year guidance cut. Organic sales are now expected to be flat to slightly down, with operating profit growth in the low- to mid-single digits.

The primary drag has been North America, Diageo’s crown-jewel market (close to 40% of sales and 50% of operating profits), where organic sales fell 2.7% and U.S. spirits dropped 4.1%. A weak consumer backdrop and the unwind of tequila’s multi-year upswing (where Diageo has heavy exposure at ~13% of sales) created tough comps after years of outsized performance, weighing heavily on the overall results.

This weakness overshadowed real bright spots: Europe turned the corner with organic growth of +3.5%, while Guinness kept defying gravity with high single-digit gains as the fastest-growing major beer brand by volume, taking share in 50 of the past 52 weeks — at a time when other beer players are taking it on the chin.

Our thesis on Diageo has always been that today’s headwinds are cyclical rather than structural, despite market pricing that suggests a more permanent impairment. The reality is that consumers are drinking better, not more, and no company in the space is better positioned to ride that premiumization wave than Diageo with its iconic portfolio.

In the meantime, while waiting for the cycle to turn, management has been executing a classic turnaround playbook: aggressive cost savings, de-leveraging the balance sheet, and prioritizing free cash flow.

On that front, progress is running AHEAD of schedule.

The Accelerate program, targeting ~$625M in savings over the next three years, remains firmly on track, with ~40% of the benefits now expected to be delivered in FY2026 alone.

Free cash flow is on track for $3B this year (6% FCF yield), with massive acceleration potential as the business inflects and underlying performance improves.

Net leverage is on course to return to the targeted 2.5x–3.0x range by FY2028, with selective disposals such as the recent ~$2.3B sale of the Kenyan drinks businesses serving as a shot in the arm for de-leveraging.

These are exactly the signs we want to see in any early-stage turnaround.

The final piece of the puzzle and a huge catalyst is the appointment of Sir Dave Lewis as CEO, a proven turnaround specialist with precisely the skill set Diageo has been lacking after years of mismanagement and boardroom drama.

Lewis is no stranger to large-scale turnarounds. Most recently, he served as CEO of Tesco, the UK’s largest supermarket, where he steered the company out of a debt-fueled accounting scandal crisis. Over his six-year tenure, he stabilized the business through selling non-core assets, aggressive cost-cutting, debt reduction, ultimately delivering structurally higher margins. Before that, he spent nearly 30 years at Unilever, earning the nickname “Drastic Dave” for his reputation as a rigorous cost cutter.

In our eyes, Lewis is exactly the medicine the doctor ordered for Diageo — finally bringing an adult into the room to drive the turnaround. It’s a story he knows all too well, and before he’s even found the coffee machine, we’re already seeing signs of the playbook in motion.

With 200+ brands and only 13 generating more than $1B in annual revenues (against $20.2B of total sales last year), there’s plenty of low-hanging fruit for strategic disposals, something Lewis is wasting no time addressing:

With the stock priced like nobody will ever sip alcohol again, trading at just ~13x forward earnings (the cheapest level going back to the GFC) it won’t take much for upside surprises as the turnaround plays out. In the meantime, investors are paid to wait with a dividend yield of 4.60%.

Much like Hormel, this is another “straw hat in the winter” boring business that we think is set up well for a volatile mid-term year.

Q1 Earnings Breakdown

10 Key Points

1) Diageo reported Q1 revenues of $4.9B, down 2.2% YoY, with the headline decline driven primarily by prior portfolio disposals. On an organic basis, net sales were flat, as 2.9% volume growth was largely offset by a 2.8% decline in price and mix. Regionally, strength in Europe at 3.5%, Latin America and the Caribbean at 10.9%, and Africa at 8.9% was more than offset by weaker results in North America, down 2.7%, and Asia Pacific, down 7.5%.

2) The Accelerate cost savings program remains firmly on track, with management still expecting about ~$625M of savings over the next three years to drive operating leverage and support industry-leading EBIT margins. Execution is running ahead of plan, with ~40% of the savings now expected to be realized in FY2026 versus the original assumption of a more even cadence. Early results are encouraging, particularly on the commercial side. In Great Britain, one of Diageo’s most profitable markets, A&P development spend has been cut in half and the number of agencies has been reduced by ~30%.

3) Free cash flow is expected to come in around ~$3B in FY2026 (~6% FCF yield), up from $2.75B in FY2025, with further annual growth as underlying performance improves. FY2023 marked a clear inflection point for free cash flow, and a return to the ~$4B range is back on the radar as management maintains discipline around A&P spend, capex, and continues to deliver on the Accelerate cost savings program.

4) Guinness continues to be a bright spot, posting 9% growth in the U.S. and significantly outperforming the beer category, taking share in 50 of the past 52 weeks. Management still sees plenty of runway to scale the business and expand capacity, with the brand’s 3-year CAGR now in the strong double digits and Guinness Draught, 0.0, and RTDs all maintaining strong momentum.

5) We have been pounding the table on the theme of multinationals benefiting from a weaker dollar environment, and Diageo is a clear example of that. With ~60% of sales generated outside North America, the company is seeing a meaningful FX tailwind, with management expecting a ~$200M boost to net revenue and a ~$50M lift to operating profit in FY2026.

6) Management’s expectations around tariffs remain unchanged, with an annualized impact of about ~$200M before mitigation. Diageo expects to offset roughly half of that impact on operating profits through mitigation efforts, before considering any broader tariff-specific pricing actions.

7) U.S. spirits organic sales declined 4.1%, driven largely by softness in tequila. The tequila category, which accounts for ~13% of Diageo’s sales, is coming off several years of outsized growth at 10% in 2023 and 6% in 2024 and has now slowed to under 3% in 2025, with Diageo’s significant outperformance over those years creating tough comps. To offset the weakness, management is leaning into RTDs to re-engage consumers and reinforce the brand halo, with the Casamigos RTD launch off to a strong start.

8) Management updated full-year guidance to reflect pressure from Chinese white spirits and a weaker U.S. consumer than originally expected. Organic net sales growth is now guided to be flat to slightly down, versus prior expectations in line with FY2025 growth of +1.7%. Management still expects positive operating leverage, with organic operating profit growth now guided to the low- to mid-single-digit range versus the prior mid-single-digit outlook.

9) Capex for the full year is now expected to come in at the low end of the $1.2–1.3B range, down from about ~$1.5B in FY2025. The lower spend comes as management continues to emphasize cost discipline and a focus on maintaining strong double-digit returns on invested capital, while still seeing meaningful opportunity for further improvement.

10) Management remains committed to returning to well within the target leverage range of 2.5x to 3x net debt to EBITDA by no later than FY2028, supported by appropriate and selective disposals over the coming years.

Earnings Call Highlights

General Market

The CNN “Fear and Greed Index” ticked up to 58 this week from 53 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)

The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) held steady at 92.93% equity exposure this week, unchanged from last week.

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