Meaty Results From Zhongpin And Tyson

By Stephen D. Simpson, CFA | May 12, 2010 AAA

These are pretty fat days to be in the protein business. Corn and soy prices, the two primary feed ingredients, are about as low as they have been in a few years, while prices for hogs and cattle are quite high. That margin, which goes by the somewhat grizzly name of "crush spread", is music to the ears of major meat producers like Tyson Foods (NYSE:TSN), while China's Zhongpin (Nasdaq:HOGS) also continues to see a benefit from ongoing economic development in its home country.

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Tyson's Trials and Tribulations
For the recently announced first quarter, Tyson reported that revenue rose 10% and the company reversed a year-ago loss into a profit of $159 million. That, in turn, was enough to surpass analyst estimates by about 35%.

Tyson saw good results across its product lines. Beef was the star in terms of top line growth (up 14%), but all three major segments showed significant operating income growth from the year-ago period. As mentioned, Tyson got a major boost from the combination of low grain prices (feed is Tyson's largest expense) and high selling prices for meat.

Unfortunately, the nature of Tyson's business is such that these fat times will not last for too long. As a company that produces its own meat, Tyson is inherently exposed to grain prices and the volatility that goes with it. On the other side, high pricing in the supermarket is not likely to last - if high prices do stick around, it is a pretty safe bet that some of Tyson's competitors, like Pilgrim's Pride (NYSE:PPC) and Smithfield (NYSE:SFD), will increase supply and drive prices back down.

As a result, it is difficult to get all that excited by these strong results. The "here today, gone tomorrow" profits of the agricultural sector have been seen far too many times to think that good times will last. Quite frankly, Tyson is a stock that you should consider buying when things look terrible and selling when the good times inevitably return. (For more, see Guard Your Portfolio With Defensive Stocks.)

Zhongpin Riding High on Hogs
Zhongpin is a bird, or rather pig, of a different feather. Unlike the U.S., China is still a highly fragmented market and one where not everyone can afford to eat meat often. In fact, the market is so fragmented that the top four players (Zhongpin is #4) account for no more than 10% of the pork market. Combine that with ongoing increases in standards of living (as people get richer, they eat more meat), and it is a much different scenario for potential investors.

Looking at Zhongpin's first quarter, revenue rose almost 33%, while net income jumped 37% and the company surpassed analyst estimates by about 10%. Chilled pork remains the company's premier product line, and the company is working hard to add capacity and forge relationships with stores and supermarkets to expand distribution.

Of course, China is a riskier market for Zhongpin than what Tyson faces in the United States. Food safety is a significant issue and customer confidence towards major food companies was shaken by a tainted milk scandal a few years ago. That said, pork is the meat of choice in China and Zhongpin's relationships with McDonalds (NYSE:MCD) and Yum Brands (NYSE:YUM) should offer something of a seal of quality.

Food Is More Interesting Far From Home
While it's hard to get excited about Tyson, Zhongpin and some of its harder-to-buy Chinese peers (like China Yurun) are much more interesting. Likewise, other off-the-beaten-track stocks like Tingyi, Cresud and Alliance Grain Traders (TO:AGT), to be more interesting than their American analogs.

Investors looking for global exposure to the food sector can certainly look to the likes of Pepsico (NYSE:PEP) and Kraft (NYSE:KFT), but readers who can absorb more risk and volatility may want to hunt for names like Zhongpin where the markets are still fragmented and the companies can post several more years of high growth. (For related reading, see Investing In China.)

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