For commodity driven companies, various economic indicators can shed valuable light onto two important lines on the income statement: COGS and Profits. The selected industry we will analyze today is the meat products industry including specific stocks:
Low Producer Prices & High Consumer Prices
As shown below, the cost of livestock (NYSEARCA:LSTK) for these meat product manufacturers has been on a steady decline since late 2014 highs. This brings the opportunity for lower COGS and wider profit margins for the three selected companies. With all three PPI's down significantly as of late, they are all down over 20%.
Lower COGS as % of Revenues
The producer price indices as shown above translate into lower COGS as a % of revenues for all three of our selected meat product stocks. Lower COGS as % of revenues leads to higher margins as noted below.
HRL data by YCharts
Higher Meat Margins
Starting with beef processing margins, they have been widening for roughly a year and a half. As prices on the producer end come down significantly, consumer prices are far more stagnant and show little to no adjustment.
The same goes for pork processing margins, as they too have been widening for roughly a year and a half. As prices on the producer end come down significantly, consumer prices are far more stagnant and show little to no adjustment.
Last but not least, for poultry processing margins, they have also been widening for roughly a year and a half. As prices on the producer end come down significantly, consumer prices are far more stagnant and show little to no adjustment.
data by YCharts
Comparing producer price indices with their related consumer price indices as done above, work very well for estimating the profit margins for the three specific companies as well as the industry in general. Shown below are charts showing producer price indices, stock performance, and profit margins for HRL, TSN, and BRID.
Hormel: We see that COGS has come down steadily for HRL and over that same period shown above. Meanwhile, profit margins have risen from roughly 6.5% to nearly 7.5%. Shares also climbed aggressively during this period.
Tyson: We see that COGS has also come down steadily for TSN and over that 1.5 years. TSN's profit margins have risen from roughly 2.35% to nearly 3% in that time. Not to mentioned, the stock performed very well in this period.
data by YCharts
Bridgford: The COGS trends for BRID pushed profits into the positive, with a current TTM profit margin of 11.84%. The stock has also risen nicely.
ETFs with Meat Exposure
Instead of trying to pick the winner out of the basket above, follow Bogle's wisdom: "Forget the needle, buy the haystack."
GRES: has an 8.24% weighting of HRL and a 7.89% weighting of TSN, placing the two in its top holdings.
FXG: has a 5.60% weighting of HRL and a 5.55% weighting of TSN making HRL and TSN the top two holdings of FXG.
As proven above, producer price indices alongside consumer price indices can be a great tool to estimate COGS and Profit as % of revenues for HRL, TSN and BRID. While this is not a viable indicator for use in short-term trading, it is a great indicator for consideration when making a longer-term investment decision regarding HRL, TSN or BRID. We look forward to tracking this topic as time goes on, and will continue to report interesting findings in this and other commodity based sub-industries.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.