Truth Or Scare? Recall Hurts Beef Producers

By Mark Whistler | February 20, 2008 AAA

An undercover video that exposed workers at a Southern California slaughterhouse kicking and dragging cattle and moving ailing animals with forklifts has triggered one of the largest recalls on record.

In all, the USDA is trying to recover 143 million pounds of beef that may have come from the Westland/Hallmark Meat Company slaughterhouse, some of which was distributed to schools. The wave of fear over possible mad-cow disease contamination could stifle beef consumption and cripple beef producers yet again. In this article we'll examine the companies with the most to lose and a few that could actually profit from a scare.

Damage is Already Done
On February 3, Steve Mendell, president of Westland/Hallmark Meat Company, posted a letter on the company's website stating, "I want to reassure our customers and consumers that our company has met the highest standards for harvesting and processing meat under the Federal Meat Inspection Act."

In headlines, the recall is based on fears that beef from ailing animals could cause Bovine Spongiform Encephalopathy (mad-cow disease). While the likelihood of the beef actually having mad-cow, or consumers actually contracting the disease is limited, the damage - at least in the press - is already done, and could affect other meat producers in the near-term.

Consumers Are Fickle
While the latest scare won't last forever, the images could make some think twice before ordering another hamburger, especially in the American Southwest. What's more, fast-food chains that have ordered from Westland/Hallmark in the past (and have stated they will no longer do so) could see sales wane as frightened consumers stay away from their stores. Some include Jack-In-The-Box and In-N-Out Burger.

After mad cow was discovered in the U.S. in 2003, both Japan and South Korea banned beef imported from the U.S. Both countries have now lifted their ban and started importing beef, but with much tighter standards on the types of beef they will accept. The problem is, with most recent recall news hitting airwaves, more international U.S. beef bans could be in the pipeline. In the weeks to come, investors in meat-product related companies could see their stocks sell in post-recall sympathy.

Moreover, the meat ban has now made headline news throughout the world, and given that America is already moving toward more heart-healthy living, the news could be the final push to make many consumers stop eating beef altogether.

Tyson Still Suffering From Avian Flu
In 2005, news of the Avian Flu touching ground in Asia spooked American consumers, even though the disease never made it to U.S. soil. Consequently, the share price of leading poultry producer Tyson Foods (NYSE:TSN) fell more than 30% in the summer of 2005, until it bottomed out in 2006. Fact is, consumers are fickle and when an industry has health fears, the stocks associated with the sector can fall through the floor very quickly. Tyson is still recovering from 2005 problems, though the company was able to post a 9-cent-per-share profit in the fourth quarter, versus a 17-cent-per-share loss in the same period of last year.

There's always the chance that Tyson could benefit as consumers begin eating more chicken, but the company already has its hands full with elevated corn-meal prices. Prices are jumping due to growing demand for ethanol.

SPAM to the Rescue
While Tyson struggles, Hormel Foods (NYSE:HRL) seems to be bucking the trend, as seen in the company's in the recent announcement that first-quarter profits surged 17% to $88.2 million (64 cents per share) from $75.3 million (54 cents per share) in the previous year. Hormel pulled though in the quarter partially because sales of SPAM surged. Some analysts attribute the resurgence of SPAM to a struggling economy and broke consumers. What's more, Hormel has stated that it will pass input price increases along to consumers, something that's helping to pad the bottom line.

Hormel is probably best known for its turkey related products, so the most recent news of the beef recall could pass by Hormel entirely. Regardless, even with the company's strong first quarter, if the industry starts to sell off, Hormel probably won't stay entirely immune.

Walking the Wire
One company that could suffer more than other meat-producers is Smithfield Foods (NYSE:SFD), which Wall Street has often associated with beef. The stock has been losing footing since the summer of 2007, but recently attempted a dead cat bounce as an article from Reuters surfaced that a recession might not hit the company quite so hard.

The problem for Smithfield and other meat-processors is many investors see beef as a risky proposition in any type of recessionary environment. During times when pennies are tight for consumers, they may simply pass on pricey beef-related dinners, exactly why Hormel had such a blow-out quarter. (For added insight, check out Recession: What Does It Mean To Investors?)

Bottom Line
At the end of the day, Americans aren't going to stop eating meat entirely. If a sell-off ensues on news of the recall, the leg down could prove to be a buying opportunity for investors in months to come. Patience will be the key though.

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