Expect Meat Consumption to Rise for Smithfield and Tyson

Smithfield's (SFD) comeback: The analysts are voicing more concerns about consumers' buying habits, alleging they are in a trend of cutting more protein from their diets in an effort to economize.

I say just the opposite. Expect consumption to go up, as anxiety ridden consumers use food as a type of drug to comfort them. We tend to eat more when we are stressed , using food as a kind of coping mechanism. There is also a natural justification to consume more food as people rationalize, since they are no longer indulging on cars, vacations and material goods, they might as well treat themselves to something else, with food as a rational choice.

The very addicting nature of food could be construed as even more powerful than a drug. Remember the aroma of sausage or bacon cooking in the morning, it's virtually impossible to pass up loading your plate up with that crispy bacon, along with your eggs, hash browns, and bagel.

Manic Analyst: Deutsche Securities Christina McGlone, has been very busy covering SFD lately, initiating three rating changes in only ten weeks. Her upgrade in December turned out to be golden , as the shares jumped more than 50% since then, but her Friday downgrade was downright perplexing. She rationalized her reduction from a buy to hold was because her $14 target had been met, but what is the point of issuing a hold rating if you feel the shares aren't due for any no further appreciation? If you expect the shares not to go any higher, what is the purpose of wanting to hold them? If her logic made sense, she would be issuing a sell rating in lieu of a hold rating. I guess this type of frivolous logic reinforces the idea why those who can, "trade", and those who can't, "analyze".

Fundamentals improving: Sow production is shrinking, while feed costs are plummeting. This means selling prices are headed higher and costs are moving lower, a very good thing when your aim is to make money. SFD's aggressive China expansion quest won't hurt matters either, as this strategy should ultimately pay off handsomely. There are more meat eaters in China than any place in the world, so it would seem insane to not attempt to exploit this growing opportunity.

Another buying opportunity developing: Let's face it, the stock has been very overbought, nearly tripling in the last six weeks alone. It is pretty obvious from the stock's massive appreciation, it has simply gone up too far in too short of a time, and a correction through profit taking is a reasonable deduction. Although Friday's downgrade sunk the shares 7%, the stock could see additional downside pressure, potentially retracing about one half of its previous gains, setting up a very tasty buying opportunity near the $10 mark.

Tyson's (TSN) CEO departure: The writing was on the wall that CEO Richard Bond's days were numbered. He was an outsider (former CEO of IBP Beef), and the difficulty of the entire protein segment wasn't exactly helping matters. A scapegoat was required. The company needed a change and his departure was expected. Goodbye Mr. Bond, you only live twice.

The company brought in former CEO Leland Tollett to clean up the mess. Tollett, who has plenty of incentive to see the company prosper (he owns 2.8 million shares) will act as interim CEO until a permanent replacement is named. The temporary CEO stressed he could be in the role three months or three years, until they find the right replacement.

Tollett exhibited an "old school" sense by claiming he would not seek to cut the work force, and his major objective is to return the poultry business to profitability (TSN's beef and pork segments are still performing quite well). His goal is to get the poultry business streamlined, letting people do their jobs their way. The market seemed impressed with his message, as the shares exhibited remarkable relative strength, rising a hefty 4%, despite a very weak overall market day.

Capacity cuts: In the past, TSN has been reluctant to reduce poultry output. Its mantra seemed to be capture market share at all costs. This strategy is okay in a normal economy, but must be abandoned in today's horrific times. It simply makes no sense to sell anything that produces a loss, period! I expect TSN's new management will soon cut capacity, helping in three ways:

1. Chicken losses will curtail.
2. Poultry prices will rise on the perception of a supply decline.
3. The analysts who have been lobbying a long time for this action will finally be pleased.

Top owners buy more: The top three shareholders, excluding Don Tyson, have been aggressively adding to their positions. Fidelity has upped its holdings 28% to nearly 31 million shares or 10% of TSN's outstanding shares. AXA pushed its holdings up 23% to 31 million shares while Tradewinds Global Investments, achieved a 7% position of control by purchasing an additional 4 million shares. This buying from these prestigious firms should add additional confidence to the market place.

Bottom line: Although both meat titans are at major crossroads, their share of bad news has already been factored into their respective share prices. Improving fundamentals coupled with low expectations and negative sentiment provide investors with a winning recipe. Both companies have ample liquidity to ride out the rough times, enabling them to be in position to prosper when better times return. I wouldn't be inclined to chase the shares higher, but would be pleased to acquire larger positions on any type of weakness.

Disclosure: Long on SFD and TSN.

Comments

[User 283977:]

The article starts with the supposition that consumers are going to increase eating protein to enhance feelings of comfort. The article then states that the stocks fundamentals are improving because Sow production is shrinking while feed costs are plummeting, and this means that selling prices are headed higher while costs are moving lower "…a very good thing when your aim is to make money."

I would argue that increased selling prices are decidedly not a good thing when people don't have jobs that allow them to buy expensive food. My guess, and note that I label it a guess, is that when household budgets gets tight people will buy more Mac and Cheese, not increase their consumption of expensive food items.

According to the author, these stocks share of bad news has already been factored into their respective share prices. Apparently, the author feels that an exponentially increasing number of lost jobs is going to spark demand for higher priced foods (??). The author also states that lower expectations and negative sentiment will translate into a winning "recipe" for investors. I question both of these allegations, however I do approve of the authors stylistic usage of food related words throughout his essay.

The author chastises Deutsche Securities analyst McGlone for issuing a hold as opposed to a sell recommendation on SFD because SFD reached her target price. I concur with the authors logic there. It seems a more appropriate rating would have been sell.

I note that the author is LONG on both of these stocks yet thinks both stocks are "very overbought" despite a seven percent drop on Friday. The author concludes that he would be pleased to acquire larger positions on any type of weakness. So the author is suggesting that investors should buy as the stocks exhibit weakness. If the authors expectations are that these stocks are likely to substantially drop, why then is the author long on these stocks?

It seems the logical play is that people holding these stocks (including the author) should sell now, and if convinced of positive investment opportunities re-purchase at the authors suggested "tasty" buying opportunity of $10. Based on the authors suggested low of $10 the stocks could drop by more then 60%.

I don't think the authors recommendations follow from the arguments provided. If these stocks share of bad news has been factored into their current share prices, then why is the author thinking the stocks will drop by 60% to $10. The article seems to logically inconsistent.

Jan 11 11:49 AM

[maelstrom:]

Well Done Bob Lund ...... Also when most people stress eat it is carbohydrate and crap food they crave..of course taken to a logical conclusion Americans have been in a state of abject panic/stress for 20years thus explaining the HUGE problem w/obesity we are experiencing. A possible outcome could be 50,000,000 people eat themselvs to death thus lowering Entitlement and health insurance cost...joke

Jan 11 03:17 PM

[Mark Krieger:]

I get your drift...but I meant to say it would probably be more advantageous to buy the shares on a pullback, rather than paying full retail. The fact is, the chances of the shares going higher from this point are probably greater than them falling. i don't have a crystal ball, but I do know that over the long term, improving fundamentals will translate into a higher stock price. I agree ,My piece had portions of inconsistentcies, but the overall stock market is plagued with "inconsistentcies" and it is difficult at times not to get "whipsawed".


On Jan 11 11:49 AM Bob Lunn wrote:

> The article starts with the supposition that consumers are going
> to increase eating protein to enhance feelings of comfort. The article
> then states that the stocks fundamentals are improving because Sow
> production is shrinking while feed costs are plummeting, and this
> means that selling prices are headed higher while costs are moving
> lower "…a very good thing when your aim is to make money."
>
> I would argue that increased selling prices are decidedly not a good
> thing when people don't have jobs that allow them to buy expensive
> food. My guess, and note that I label it a guess, is that when household
> budgets gets tight people will buy more Mac and Cheese, not increase
> their consumption of expensive food items.
>
> According to the author, these stocks share of bad news has already
> been factored into their respective share prices. Apparently, the
> author feels that an exponentially increasing number of lost jobs
> is going to spark demand for higher priced foods (??). The author
> also states that lower expectations and negative sentiment will translate
> into a winning "recipe" for investors. I question both of these allegations,
> however I do approve of the authors stylistic usage of food related
> words throughout his essay.
>
> The author chastises Deutsche Securities analyst McGlone for issuing
> a hold as opposed to a sell recommendation on SFD because SFD reached
> her target price. I concur with the authors logic there. It seems
> a more appropriate rating would have been sell.
>
> I note that the author is LONG on both of these stocks yet thinks
> both stocks are "very overbought" despite a seven percent drop on
> Friday. The author concludes that he would be pleased to acquire
> larger positions on any type of weakness. So the author is suggesting
> that investors should buy as the stocks exhibit weakness. If the
> authors expectations are that these stocks are likely to substantially
> drop, why then is the author long on these stocks?
>
> It seems the logical play is that people holding these stocks (including
> the author) should sell now, and if convinced of positive investment
> opportunities re-purchase at the authors suggested "tasty" buying
> opportunity of $10. Based on the authors suggested low of $10 the
> stocks could drop by more then 60%.
>
> I don't think the authors recommendations follow from the arguments
> provided. If these stocks share of bad news has been factored into
> their current share prices, then why is the author thinking the stocks
> will drop by 60% to $10. The article seems to logically inconsistent.
>

Jan 12 09:33 AM

[ing_rivera:]

SFD and TSN, this year 2008, for the first time in the last 10 years traded below their tangible equity, it was about time! From that point they had jumped over a 100% already, approximately to their intrinsic value or a bit above it.

The stock market just follow business economics under the long term, the economic rule that apply to both of these is "businesses in perfect competition earn zero economic profit in the long term" therefore they can't be worth more than their tangible equity. SFD and TSN are big and might have a competitive advantage which makes them more valuable but I doubt is much more than twice their tangible equity, since they operate in commodity industries.

Jan 13 07:07 PM