German statesman Otto von Bismarck noted, "If you like laws and sausages, you should never watch either one being made." Perhaps we might apply that sentiment to valuations of pork processors, too, because their share prices ought to make you squeamish.
Pig in a poke
Hog farmers have been squealing ever since the H1N1 virus was first identified as "swine flu". This industry, supposedly beset by bad PR, has watched the stock of the average meat-products company climb 57% over the past six months, compared to a 29% rise in the S&P 500. Hormel Foods (NYSE: HRL ) is up 12%, Tyson (NYSE: TSN ) jumped 19%, and Smithfield Foods (NYSE: SFD ) soared 24% since swine flu became the panic du jour.
Maybe P.T. Barnum's quote would apply here: "I don't care what the newspapers say about me, as long as they spell my name right." Maybe there really is no such thing as bad publicity.
Nor is the surge confined to domestic producers. Chinese pork products maker Zhongpin (Nasdaq: HOGS ) is up nearly 60%, and Brasil Foods (NYSE: PDA ) rocketed nearly 90% higher. In fact, the only loser in the bunch is Sanderson Farms (Nasdaq: SAFM ) , which lost 9% over the past six months. That could be because it’s a chicken farmer, but Fools know to watch out for stocks that are beset with temporary problems.
No need to be piggish about it
Yet industry statistics show that investors ought to be worried about their companies' valuations. Pork prices slid as soon as the two syllables "swine flu" were enunciated, and they haven't recovered since. As of mid-August, hog futures were the second-worst commodity investment this year, and from that level, analysts have predicted that prices will fall another 33% by year's end.
The market's gotten so bad that the pork producers are seeking a federal bailout. Legislators from pork-producing states want the government to buy $100 million worth of pork for federal food programs. They say pork producers have lost more than $4 billion in equity since September 2007.
Pork-barrel politics
Obviously, those losses occurred before the swine flu outbreak, and producers' request doesn't account for the $151 million worth of pork the government already purchased this year.
China is the biggest producer and consumer of hogs in the world, but its imports from the U.S. fell 70% in the first six months of this year. With China's ban on pork from three U.S. plants still in effect, prior-year comparisons will likely get worse. As a result, U.S. hog farmers may have to reduce their sow population by at least 5%-10%, say analysts. That might spell higher prices for farmers in the future, but only if the farmers survive.
So why are the stocks of meat companies running up the charts faster than a greased pig? If things are as bad as they appear, and I don't doubt that they are, we're facing some serious earnings issues soon, which will likely lead to share prices plummeting lower than pork bellies.
Not-so-tasty pork rinds
In the meantime, anticipate dining in style. The Christmas ham is poised to get a whole lot cheaper, while investors might rightly expect Smithfield, Hormel, and AgFeed Industries (NYSE: FEED ) to feel like they're being led to the slaughter.
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