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Investors Liking The Taste Of U. S. Meat Companies

“Even though we may be at the bottom of the recession, we still have to climb out of it.”

– JIM ROBB

Investors like the taste of meat again, bidding up shares of Tyson, Smithfield, Hormel and Sanderson Farms as the spring and summer cookout season is about to heat up.

While some of these gains can be tied to the recent rise in the broader stock market, investor interest in the meat group has some logic. Meat sales generally improve when warm weather arrives and outdoor grills are dusted off and fired up.

Also, U. S. meat production will be down this year after cattle, hog and chicken producers lost money in 2008 due to issues such as high feed prices, leading them to shrink herds and flocks. The smaller supplies should drive up prices and meat company profits once recession-battered consumers start eating out again.

Meat companies such as Tyson Foods Inc., Smithfield Foods Inc., Sanderson Farms Inc. and Hormel Foods Corp. still have a bumpy road ahead.

The recession here and overseas continues to keep consumers away from restaurants and has them buying lower-priced meat items like hamburgers and hotdogs, or grain-based foods like rice and pasta.

U. S. meat exports have declined and will likely remain down for 2009.

SHARES UP SHARPLY

“Even though we may be at the bottom of the recession, we still have to climb out of it. Demand is clearly an issue, both domestic and foreign,” said Jim Robb, analyst at the Livestock and Meat Information Center.

The flight to meat companies may be due to less favour-able options elsewhere in the market.

“They may be good compared with the alternatives,” Paul Aho, economist at Poultry Perspective, said of meat company shares. “Would you put your money into GM right now or into a chicken company? I think food is going to be popular. People have to eat – they may eat less, but they eat.”

Tyson Foods is the largest U. S. meat company with beef, pork, and chicken. Its shares have more than doubled since November, to nearly $11.

“Tyson’s outlook remains mixed, as improving chicken fundamentals may be offset by weaker beef and pork,” Kenneth Zaslow, food analyst at BMO Capital Markets, said this week in a research report.

Shares of top pork producer Smithfield Foods have topped $11, more than doubling since March.

At Sanderson Farms, the No. 4 U. S. chicken producer, shares have nearly doubled since November to $42, their highest level since August. Sanderson has often been a favourite of analysts because of its low debt load and efficient operations.

“We increased our fiscal year 2009 and fiscal year 2010 earnings per share for Sanderson as we estimate it will generate a profit ahead of our initial expectations,” said Zaslow.

At Hormel Foods Corp. , known for its Spam, Dinty Moore Stew and Jennie-O turkeys, share movement has not

been as robust, with the price at about $31.60 April 9 compared with the March low of $29.40.

TROUBLES STILL LOOM

The beef and pork sectors, in particular, are still struggling, which could be a concern for investors in Tyson, Smithfield and Hormel.

Beef has been troublesome as sluggish consumer sales have kept a lid on prices, while a smaller herd has held up the cost of cattle. This week, beef plants lost more than $50 on each of head of cattle slaughtered.

Beef plants have been reducing production, but not enough to improve profits.

“March was the worst month for beef packer margins since November 2007,” said Robb.

Beef packer margins likely will turn profitable no earlier than the summer, unless packers reduce production even more over the next several months, said Zaslow.

A possible threat to beef’s recovery is a dairy-herd reduction effort that may send more dairy cows to slaughter this summer.

While the beef from that effort will be mostly hamburger, it will still increase overall supplies and pressure prices not only for beef but pork and chicken too, Farha Aslam, analyst with Stephens Inc., said in a note.

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