Sunday, January 24, 2010

In Hog Heaven With Hormel Foods

HORMEL FOODS Corporation (New York:HRL) Data as of: 01/22/2010

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Hormel Foods Corporation, based in Austin, Minn., is a multinational manufacturer and marketer of consumer-branded food and meat products, many of which are among the best known and trusted in the food industry. The company leverages its extensive expertise, innovation and high competencies in pork and turkey processing and marketing to bring quality, value-added brands to the global marketplace. The company is a member of the Standard & Poor's 500 Index. Hormel Foods was named one of "The 400 Best Big Companies in America" by Forbes magazine for the 10th consecutive year. The company enjoys a strong reputation among consumers, retail grocers, foodservice and industrial customers for products highly regarded for quality, taste, nutrition, convenience and value. For more information, visit

Unilever announced that it has signed a definitive agreement with Hormel Foods Corporation to sell its Shedd's Country Crock(R) branded chilled side-dish business in the US. Under the terms of the transaction, Hormel will market and sell Shedd's Country Crock chilled side-dish products, such as homestyle mashed potatoes, under a license agreement.

By the Numbers

Quarterly sales for the last four reported quarters are inconsistent. For the quarter ending 01/09, sales stood at $1,689.1 million. Over the next two quarters they declined to $1,574.4 million and then turned up to $1,675.1 million for the quarter ending 10/09. Reuter’s reports analyst estimates for the quarter ending 01/10 may be as high as $1,729.5 million.

The decline in the sales (3.3%) may be attributable to a lack of pricing power in today’s environment. Historically, sales grew at the rate of 4.4% over the past three years and 6.5% over the past five years. The Company is adding new product through the acquisition of Shedd’s Country Crock product line and through the introduction of Mexican foods by its new joint venture MegaMex Foods. These additions should boost sales.

On the other hand, quarterly earnings held up fairly well. The Company reported EPS of $0.60 in the quarter ending 01/09 and declines to $0.59 and $0.57 in the quarters ending 04/09 and 07/09 respectively before jumping back to $0.77 for the quarter ending 10/09. Reuter’s reports consensus estimates of $0.68 for the quarter ending 01/10.

Looking ahead, consensus estimates are $2.67 for FY 10 and $2.87 for FY 11 on sales of $6,782.71 million and $7,111.07 million. The EPS growth rate exploded for the TTM ending 10/09 to 21.9%. The three year average EPS growth rate is 7.0% and the five year EPS growth rate is 8.6%.

The gross margin for the trailing twelve months ending 10/09 (TTM) at 16.8% have held up well and reflect strength when compared with FY 08 and FY 07. Similarly, operating margins have grown from 7.8% in FY 07 to 7.6% in FY 08 to 8.2% in FY 09. Net margins reflect these trends, as well. Net margin recovered to 5.2% in 10/09 from 4.2% in 10/08.

Both operating and net margins are consistently better than industry medians. This reflects well on management’s ability to control costs. Return on Equity at 16.6% and Return on Assets at 9.4% are higher than in the prior three fiscal years and above industry medians.

Hormel has a strong balance sheet. The current ratio stands at 2.3X (better than the industry median) and total liabilities to total assets stand at 42.5%, below the industry median.

Long-term debt stands at $350 million. The times interest earned ratio is better than 19X.

The Company pays an indicated dividend of $0.84 providing a current yield of 2.2%.The dividend is well covered and represents a payout of 29.7%. Dividends have grown at an annual rate of 10.7% over the past three years and 11.1% over the past five years.


We see modest but consistent growth potential for Hormel Foods. Based on the consensus EPS estimate of $2.87 for FY 11 and our evaluation of risk, we place an investment value of $56.29 on this company. We think this is a buy.

Disclosure: Author has a long position in HRL.

Monday, January 18, 2010

Fuqi International: Finding Gold In China

Fuqi International (Nasdaq: FUQI) Data as of: 01/15/2010

Industry: Jewelry & Silverware

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The “Middle Kingdom”, China, is undergoing another, unspoken revolution. There is small, yet growing middle class that is demanding more consumer goods. As China’s economy continues to grow, this population longs for luxury goods.

Fuqi International, Inc. (FUQI) is a designer of precious metal jewelry in China, developing, promoting, and selling a range of products in the Chinese luxury goods market. The Company’s products consist of a range of styles and designs made from gold and other precious metals, such as platinum and Karat gold. FUQI also produces jewelry items that contain diamonds and other precious stones on a custom-order basis. Its design database contains over 30,000 products. The Company operates through wholly owned subsidiary Fuqi International Holdings Co., Ltd. As its wholly owned subsidiary Shenzhen Fuqi Jewelry Co. Ltd. The Company has about 70 jewelry retail outlets and stores in China.

“Fuqi International, Inc. raised its fiscal 2009 outlook and expects revenue of approximately $519.4-$528.4 million. These estimates include both wholesale and retail revenues and exclude the impact from any potential acquisitions and net income of approximately $53.5-$54.9 million, or diluted earnings per share (EPS) of $2.21-$2.27. For fourth quarter of 2009, it expects total revenue between approximately $182.0-$191.0 million, which includes wholesale and retail revenues and net income to be in the range of $15.2-$16.6 million, or $0.55-$0.60 per diluted share. According to Reuters Estimates, analysts were expecting the Company to report revenues of $184.6 million, net profit of $16.3 million and EPS of $0.59 for fourth quarter of 2009 and revenues of $525.4 million, net profit of $47.2 million and EPS of $1.94 for fiscal 2009.”

In a recent press release, the Company reported the following:

FUQI to Exclusively Commercialize, Manufacture, Distribute and Market Popular Chinese Animated Cartoon Jewelry Products

9:01a ET January 8, 2010 (PR NewsWire)

FUQI International, Inc. (Nasdaq: FUQI) today is pleased to announce that the Company has recently launched a new product campaign promoting a series of gold jewelry products based on the popular Chinese animated cartoon figures, "Pleasant Goat and Big Big Wolf." FUQI is the first jewelry company in China to obtain the exclusive rights to commercialize, manufacture, distribute, market and sell "Pleasant Goat and Big Big Wolf" jewelry products in mainland China.

The Company signed an exclusive two year partnership agreement with a subsidiary of Infoport Management, which owns the licensing distribution rights to the "Pleasant Goat and Big Big Wolf" animated series. Under the agreement terms which expire at end of January 2012, FUQI will exclusively manufacture, distribute, market and sell in mainland China new jewelry products such as precious metal coins, bracelets, pendants and rings based on these animated cartoon characters.

By The Numbers

· FUQI has a Price/Earnings ratio of about 10X based on trailing twelve month earnings and an EPS growth rate of 47%. The PEG ratio is a favorable 0.2X.

· The inventory to sales ratio is decreasing.

· The long-term EPS growth rate is 47%.

· The Company’s balance sheet is clean with no long-term debt and a current ratio of 4.3X.

· The net profit margin is a healthy 10.3%; substantially better than the industry median.

On the negative side:

· FUQI has negative free cash flow. The Company cannot finance growth without raising more capital.

· The Price/Book ratio is high at 1.8X.

· Earnings growth weakened in the past year though there are signs of acceleration in the most recent reported quarter and for the quarter ending December 2009.


We have a short-term price target of $24.50. Longer term, we would insist on positive and growing free cash flow to support expansion and growth.

DISCLOSURE: The author has a long position on FUQI.

Sunday, January 10, 2010

Sorl Auto Parts Inc – No Stopping Here

Measured Approach

Sorl Auto Parts, Inc. (Nasdaq:SORL)

Industry: Auto & Truck Parts

Based on filings with the Securities and Exchange Commission (SEC), through its 90% ownership of the Ruili Group Ruian Auto Parts Co., Ltd., a sino-foreign joint venture (the "Joint Venture"), SORL Auto Parts, Inc. (the "Company") develops, manufactures and distributes automotive air brake valves and related components to automotive original equipment manufacturers, or OEMs, and the related aftermarket both in China and internationally. Installed on the chassis, air brake valves include a collection of various air brake components using compressed air and functioning as the execution device for service braking and parking braking. The Company's products are principally used in commercial vehicles weighing over three tons, such as trucks and buses.

The company has an established sales network of 28 authorized distributors throughout China selling to companies such as FAW Qingdao Automobile Works, First Auto Group, Dongfeng Axle, Beiqi Foton Motors, Zhucheng Automobile Works, and Liuzhou Special Auto Manufacturing. The company’s major international customers include Golden Dragon Auto Spare Parts, ITM, LIL/MILA, Makrotech, Polmo and Fota.

Sorl seeks to expand its international customer base and has received delegations from Brazil, India, Russia and the United States. The company has four authorized sales centers in Australia, United Arab Emirates, India and the United States with additional offices slated to open. Sorl projects exports will increase by 30% in 2010.

By The Numbers

· The PEG ratio for SORL (0.97) is favorable. SORL seems valued at a discount with one of the lowest PEG ratios in the Auto & Truck Parts industry

· The average of the 1, 3, and 5 year EPS (basic) growth rates is a healthy 29.2%

· Debt to Equity is 0.0%

· The average of the 1,3, and 5 year Revenue growth rates is a string 23.83% and in line with the EPS growth rate

· Quarterly net Revenues are accelerating

· Quarterly EPS is accelerating

· Long-term debt ($0.00) is less than net current assets

· Both the Quick Ratio and the Current Ratio indicate financial strength

· Inventory to sales grew to 14.59% in FY08 from 7.08% in FY07 (This is a negative)

· ROE declined to 10.3% in the TTM ending 9/2009 from FY08 15.2%

· SORL is doing a good job in comparison to its peers with a Return on Assets, Return on Equity, and Revenues Per Employee

· SORL is one of the more profitable companies in the Auto & Truck Parts industry with a net margin of 8.8%. Its operating margin and net margin are among the strongest of any peer while its gross margin is above the industry median


Sorl Auto Parts, Inc. is a strong candidate to play the industrial expansion in China. Air brakes are a niche product but essential in the manufacture of trucks and busses. The company is already the leading manufacturer of air brakes in China. We rate SORL a buy at current price levels.

Disclosure: Author has a long position in SORL.

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