Smithfield Foods Buyout By Shuanghui May Cause These U.S. Food Companies To Pop

Includes: DF, HAIN, HSH, SFD, TSN
by: David White

Subject to Smithfield Foods' (NYSE:SFD) shareholder approval and U.S. regulatory approval (the approval of the Congressional Committee on Foreign Investment), Shuanghui International Holdings had made a deal to buy Smithfield Foods -- the world's biggest hog producer -- for $4.7B ($7.1B including debt or about $34/share). This deal makes perfect sense for the Chinese. U.S. food is relatively cheap. Ask any of your friends who have traveled abroad: Food is much more expensive worldwide vs. U.S. internal prices.

I won't debate the question of whether or not this deal is in the long-term best interests of the U.S. economy. It probably is not. If it goes through, the U.S. can eventually expect to see more meat being shipped to China. This will be good for the trade deficit, but it will assuredly mean that prices for food will go up in the U.S. China has a huge population (1.344B in 2011), and that population has a huge appetite. Regardless of the outcome of this particular sale, economic laws dictate that we will see more food being exported from the U.S. to China in future years. Plus, let's not forget about India with a population of 1.241B or other emerging economies. CP Group (Charoen Pokphand Group) of Thailand is rumored to be preparing a competing bid for SFD. Brazil's JBS is rumored to be preparing a counter offer also.

For investors, a good question may be: "How can I benefit from the likely longer-term trend this sale points to?" One answer is to invest in other possible buyout targets. The problems with this strategy is that one never knows when a buyout will take place. Hence, the real answer is that one should invest in value investments in the food/meat production industry. If these companies are also good growers, then so much the better. Of course, the small to medium capitalization companies are more likely to grow quickly and they are more likely to be bought out. A few of SFD's peers that fit this description are Tyson Foods (NYSE:TSN), Hillshire Brands Company (NYSE:HSH), Dean Foods Company (NYSE:DF), and The Hain Celestial Group (NASDAQ:HAIN). I have included a brief description of each below. Those serious about making an investment in one or more should do more research.

Tyson Foods engages in the production, distribution and marketing of chicken, beef, pork, prepared foods, and related products worldwide. It has a market capitalization of $9.0B. Its five year chart has been in a long-term uptrend since the stock market nadir in 2009 (see chart below).

Click to enlarge images.

Analysts expect +8.90% EPS growth in 2013 and +20.70% EPS growth in 2014 for TSN. However, growth has been slowing recently. The past five years per annum EPS growth was 51.56%. This is perhaps a warning sign. The P/E of 17.39 and forward P/E of 10.10 both seem quite reasonable for this type of stock, which has been a fast grower in the past. TSN has an analysts' mean recommendation of 1.9 (a buy). It has a price/book ratio (mrq) of 1.48 is reasonable; and it has adequate cash flow. I am not excited by this stock's recent fundamentals. However, they are good enough to make it a candidate for a worldwide acquisition; and it may grow decently on its own regardless of the presence or absence of takeover attempts. TSN pays a 0.80% dividend.

Hillshire Brands Company engages in the manufacture and marketing of meat-centric food solutions for the retail and food service markets worldwide. It has a market capitalization of $4.32B. Its five-year chart has been in a strong long term uptrend since the stock market nadir in 2009 (see chart below).

Analysts' expect 17.00% EPS growth in 2013 and 5.20% EPS growth in 2014. This is something of a turnaround story. Its past five-year per annum EPS growth was -9.70%. Its next five-year per annum EPS growth is expected to be +9.20%. It has a P/E of 5.32 and a forward P/E of 19.39. This data is a bit disturbing. Plus, HSH has an average analysts' recommendation of 2.5 (a high hold or low buy), and its price/book ratio (mrq) of 10.20. This doesn't begin to compete with TSN's fundamentals in these categories. Also, its levered free cash flow (TTM) is -$246.75 million. This is troublesome when the world may be heading into very uncertain economic times. Its total debt/equity ratio (mrq) of 224.88 is disturbing. It pays a dividend of 1.40%.

Dean Foods Company is a food and beverage company. It processes and distributes milk, other fluid dairy products, and plant-based beverages. It has a market capitalization of $1.96B. Its five-year chart has been in a strong long-term uptrend since the late summer 2011 (see chart below).

Analysts expect -61.90% growth in 2013 and +30.20% growth for DF in 2014. Their longer-term projections are less ambivalent. Analysts forecast next five-year per annum EPS growth of +13.70%. DF has a P/E of 3.17 and a forward P/E of 15.20. This is not overly disturbing given the EPS forecasts mentioned above. DF has an average analyst recommendation of 1.9 (a buy). Its price/book ratio (mrq) of 2.30 is within reason and it has positive cash flow. However, its total debt/equity ratio (mrq) of 191.78 is disturbing.

The Hain Celestial Group -- together with its subsidiaries -- manufactures, markets, distributes, and sells natural and organic food products. It has a market capitalization of $3.22B. Its five-year chart has been in a strong long-term uptrend since the stock market nadir in 2009 (see chart below). In fact, one seldom sees a chart this strong.

Analysts expect +32.30% EPS growth in 2013 and +18.70% EPS growth in 2014. HAIN is easily the strongest grower in this group of four stocks, and the chart above bears that out. Longer term, analysts forecast a five-year per annum EPS growth of +16.33%. This is so good that some might even call HAIN a growth stock. It has a P/E of 28.57 and a forward P/E of 23.33. These are high, but given HAIN's growth potential and history, they are not too high. HAIN has an average analysts recommendation of 1.9 (a buy). It has a price/book ratio (mrq) of 2.84, which is not unreasonable for a quickly growing company. It has positive cash flow. It has a total debt/equity ratio (mrq) of 58.15. This is high, but it is not surprising in a quickly growing company.

All told, Tyson foods and The Hain Celestial Group seem to be the best overall investments. Given that the U.S. Q1 GDP was revised downward today from 2.5% to 2.4%, when some were expecting an revision upward to 2.7%, this may not be the day to buy a new stock. Initial jobless claims also took an unexpected negative move up to 354,000 vs. an expected 340,000. These data may pressure the market today. In fact, with the recent trend (the past few days) downward, these data could lead to a several day continuation of the downtrend.

Of course, the market is unpredictable, so it is hard to be sure of anything. Still, investors may want to wait for the market to shake itself out of its current negativity. After that, entry into TSN or HAIN might be a good idea. DF and HSH are less attractive, after a quick examination, but perhaps a more thorough look at one or both would reveal much better prospects. Keep in mind that food demand by emerging market nations could easily push prices for these companies up considerably, especially in a quickly growing world economy.

Note: Much of the fundamental financial data and descriptions of the companies above was taken from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TSN, HAIN over 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.