Hormel Foods is continuing its move into the organic food market.
The maker of Spam on Wednesday announced the $286 million purchase of organic snacks company Justin’s LLC as it reported profits that jumped 20 percent in the latest quarter and raised its outlook for the second consecutive period.
Yet the Austin-based company’s shares fell more than 8 percent, spurred at least by some doubts about whether it could sustain its favorable operating margins.
Justin’s is a Boulder, Colo.-based producer of nut butter snacks such as organic peanut butter cups and snack packs that are available at some Whole Foods, Lunds & Byerly and Target stores. Hormel said the purchase complements its brand portfolio, which includes Skippy peanut butter, and fits with younger and more health-conscious consumers.
“We are excited to work together with the Justin’s team to bring these great natural and organic products to even more consumers, leveraging key Hormel Foods resources to drive continued innovation and growth to this on-trend category,” said James Snee, Hormel’s chief operating officer, in a statement.
Brian Yarbrough, a stock analyst at Edward Jones, said he thought it was a good deal for Hormel.
“I do think it’s a growing category,” he said. “It’s natural, organic; that’s where all the growth is.”
Hormel moved into organic and natural meats last year with the $775 million purchase of Applegate Farms, based in New Jersey.
Yarbrough suspected that the drop in the company’s stock happened as investors started to think that at some point segments will adjust back in line with how they historically performed.
“They were basically operating for the last year in a perfect storm, not in a negative sense but in a positive sense, where they saw their commodity costs go down, they saw their input costs go down and then pork prices were high,” he said. “They were just operating in an environment where margins were unsustainably high.”
Hormel said it earned $215.4 million in its fiscal second quarter ended April 24, up from $180.2 million a year ago. The profit amounted to 40 cents a share, a penny more than the consensus forecast of analysts.
Sales were up 1 percent to $2.3 billion, in line with analyst expectations.
The company raised its fiscal 2016 earnings guidance range from $1.50-to-$1.56 per share to $1.56-to-$1.60 per share.
Refrigerated foods, Hormel’s largest business, saw a 13 percent increase in operating profit helped by growth in sales of Hormel Natural Choice lunch meat, pepperoni and party trays. The unit reported strong profit margins in its pork business and the addition of business from Applegate.
While the segment reported a 3 percent growth in volume, Hormel CEO Jeff Ettinger told analysts during a conference call that without the Applegate sales, volume would have taken a hit.
Grocery products saw profits rise 21 percent as the company experienced favorable raw material costs and improved plant efficiencies, but volume was down 1 percent. For the company’s Jennie-O turkey business, profits increased 20 percent. However, volume was down 5 percent as the company dealt with the aftershocks of a bird flu epidemic last year that curtailed turkey production.
“Production volumes have now returned to normalized levels and we remain optimistic that avian influenza is behind us,” Snee said during the call.
Profits for the specialty foods segment, which includes Muscle Milk protein drinks, were up 74 percent while volume was down 2 percent.
Hormel’s international division posted the only decline in operating profit, which was negatively affected in part by high pork input costs in China.