The Smiths' vegan front man Morrissey may have crooned, "Meat
is murder!" but the fact remains that meat is big business.
Take a look at figures from the U.N. Food and Agriculture
Organization, which projected a 5% annual growth rate of the
poultrymarket in most countries until 2015.
And in 2012, meat production climbed to more than 300 million
tons, according to the same report. That's alot of chickens. No
wonder Morrissey and the other vegans are upset.
As you can imagine, meat companies have historically made
solidinvestments . But the opportunity toprofit hasn't passed.
I've come across threestocks in this industry worth considering,
with one standing out as my favorite.
1. Hormel Foods (
This dividend-paying, food-making dynamo has paid dividends for
the past 47 years.
The company specializes in the production and marketing of
various food and meat products, including Spam and Country Crock.
The Januaryacquisition of Skippy peanut butter expands Hormel's
product offerings into another kitchen staple.
My colleague Jay Peroni recently profiled thestock here. He
pointed out thatshares are higher by 177% during the past seven
years and cited the company's strong financial picture as the
reason for the impressive growth.
Theearnings before interest,taxes ,depreciation
andamortization have interest expense covered by nearly 70 times
as of the end of 2012, and its forward price-to-earnings (P/E )
ratio is a healthy 17, compared to the sector's average of 27. A
lower P/E often signals a stock that isundervalued in relation to
its peers. Add in operating margins of approximately 10%, and it
creates a compelling case for this meat stock.
The weekly chart shows the stock broke out of a base of $28 a
share range in October 2012. The stock has since rallied to just
2. Tyson Foods (
This nearly $9 billionmarket cap meat producer distributes and
markets chicken, beef, pork and related items globally. It has an
excellent P/E ratio of 14.77 and a quarterlygross profit margin
of just above 6%. A price-to-earnings growth (PEG ) ratio close
to 8 and a trailing 12-month income of $600 million has powered
shares to a 100%gain since August 2012. But technically, it
appears the stock has hitresistance at just above $24 a share. I
would await a pullback before purchasing shares.
3. Smithfield Foods (
While both stocks paint a compelling picture for a
long-terminvestment , there's another stock in the meat sector
that has my vote as the ideal immediate investment: Smithfield
This stock has lagged behind Tyson and Hormel until its
third-quarter earnings release on March 7; shares soared 11%
after announcingearnings per share (
) of 44 cents, beating estimates of 39 cents a share. A possible
split the company's divisions was also mentioned in the earnings
conferencecall , fueling the speculative move higher.
Smithfield shareholder Continental Grain issued a letter
explaining the logic behind a possible corporate split. Shares
rallied close to another 5% on the news.
Shareholders expect Smithfield to split into three businesses:
pork and packaged meat, hog farms, and another that specializes
in international business.
It is argued that this potential breakupwill boost returns by
dropping the unprofitable hog-raising business. Someanalysts
estimate a split could lift the stock 50% to $48 a share.
But President andCEO C. Larry Pope is against a breakup.
Smithfield points out that the fiscal third quarter earnings
jumped to almost $82 million despite the losses at its hog farms.
He says the hog farms provide a competitive advantage that would
be lost should the company be broken up. In addition, he thinks
things are improving at the hog farms and they should soon be
adding to thebottom line . I don't think he will be able to
withstand the shareholder pressure. Therefore, Smithfield looks
like a great speculative entry right now. Technically, the stock
has pulled back from its high, creating an opportunity.
Risks to Consider:
Smithfield Foods is a speculative buy due to the fact that
quick additionalupside is dependent upon the breakup of the
company. I firmly think it will occur, but no one knows for
certain. Tyson and Hormel are strong stocks, but their prices may
Action to Take -->
Smithfield Foods is my favorite of the three stocks because it is
in play right now and has a favorable technical picture. My
18-month target on the stock is $42.
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