Meat Companies Earning Their Pound Of Flesh

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Includes: BRID, FXG, GRES, HRL, LSTK, TSN
by: FX Metrix, LLC

Summary

Producer Price Indices applicable to HRL, TSN & BRID have been steadily declining.

Related Consumer Price Indices have not followed suit, and have remained high leading to higher profits.

We recomend some ETFs with significant exposure to the meat processing stocks.

Background

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:

  • Hormel Foods Corp. (NYSE:HRL)
  • Tyson Foods, Inc. (NYSE:TSN)
  • Bridgford Foods Corp. (NASDAQ:BRID)

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%.

US Producer Price Index: Farm Products: Slaughter Cattle Chart

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 Chart

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.

US Producer Price Index: Farm Products: Slaughter Cattle Chart

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.

US Producer Price Index: Farm Products: Slaughter Hogs Chart

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.

US Producer Price Index: Farm Products: Slaughter Poultry Chart

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.

US Producer Price Index: Farm Products: Slaughter Livestock Chart

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.

US Producer Price Index: Farm Products: Slaughter Livestock Chart

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.US Producer Price Index: Farm Products: Slaughter Livestock Chart

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.

Conclusion

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.

References

GRES Holdings

FXG Holdings

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.