Pestilence stalking the world's commercial swine herd, plus a breakthrough in trade talks with China, could spell strong profits for Tyson Foods (TSN 0.49%), major producer of pork, beef, and chicken. With the vast Asian market feeling the ongoing pig die-off's impact, Tyson, famous Spam maker Hormel Foods (HRL 1.00%), Archer Daniels Midland (ADM 2.15%) and others might win big in the coming months. But lingering risks could still prevent some companies from living too high off the hog.
African swine fever and world food supply
The potential for big profits (and rising stock prices) for Tyson and other American processed meat producers comes from a porcine disease outbreak of unprecedented scale. African swine fever virus or ASFV is a viral hemorrhagic fever, which originates in populations of warthogs and other wild pigs in Africa. With symptoms similar to the dreaded Ebola virus, ASFV fortunately only infects pigs – humans are immune. Like Ebola, though, it's extremely contagious and spreads like wildfire among domestic pigs, through contact with even trace amounts of contaminants.
ASFV, or "pig Ebola" as some have dubbed it, is cutting a swath through the world's domestic pig population. The virus apparently kills nearly 100% of infected domestic swine, though warthogs, its natural host, seemingly don't even show symptoms. The porcine plague wiped out a startling 25% of the world's entire domestic pig population by early October. The appearance of ASFV in one pig prompts the entire herd's slaughter in an effort to contain its advance. ASFV has spread to more than 50 countries worldwide despite these measures. On Dec. 19, it was confirmed to have spread to yet another country, Indonesia, killing 27,000 pigs in North Sumatra province.
IMAGE SOURCE: GETTY IMAGES
The impact of ASFV on economic conditions and food supply is already tremendous. Pork is a dietary staple of China's 1.1 billion people, with the same holding true across Asia. In the enormous Chinese market, 150 million pigs – or half of the country's entire domestic pig population – have already died, with another 15 million projected to perish by year's end.
Chinese National Bureau of Statistic Figures indicate the scope of the crisis. 70% of all meat eaten in China is pork, and the price of pork has shot up 70%. Pork imports are up 44% and beef imports by 50% in the first nine months of 2019, and a shortfall of 10 million tons of pork is still expected by year's end. Some analysts believe that China's pig stock won't recover to pre-ASFV levels until four to six years after widespread vaccination – and a vaccine has not yet been invented.
American meat companies move up to the trough
So far, ASFV hasn't appeared in the United States, giving American meat companies like Hormel the opportunity to export the highly desired meat profitably to China – along with chicken and beef. The United States and China reached a partial trade deal in the second week of December, postponing key tariffs. Additionally, the Chinese agreed to open up part of their agricultural market to American imports again – including, predictably enough, meat to reduce the shortfall resulting from "pig Ebola's" inroads.
Of course, a lot depends on the ability of America's biosecurity measures to keep Africa swine fever virus out of the States. With ASFV already in Poland, Latvia, and other Eastern European countries, it's probably too late to prevent its spread throughout Europe. However, Australia has successfully kept the disease out to date despite outbreaks in nearby countries, using methods as diverse as human inspectors and sniffer dogs. America's oceanic isolation and the pig-free desert on its southern border will likely help to maintain similar levels of security for some time.
Prominent independent research firm CFRA projected up to 100% growth in Chinese agricultural imports from the USA in 2020 during their December "2020 Foresight" discussion. This could amount to $20 billion in total.
Tyson's strong position for 2020
Among American meat producers, Tyson enjoys some advantages that may allow it to springboard ahead of the competition when it comes to profiting from ASFV's food market impact. On Sept. 16, China specifically greenlighted Tyson to begin shipping to the Chinese market from all three dozen of its American plants.
Tyson already showed strong share price growth during 2019, with roughly 70% gains. While some companies in the sector did even better – Pilgrim's Pride (PPC 0.77%), for instance, enjoyed more than 110% share price growth over the same period – Tyson far outpaced its rival Hormel, which grew only an anemic 9%. The massive Chinese meat sales will help to make up for the inroads made by plant protein competing with chicken producer profits.
Compared to Tyson's Q4 2018 results, the company shows strong growth even before the full impact of China's eased tariffs and intense meat demand arrives at the start of 2020. Tyson's Q4 2019 results showed 11% revenue growth year over year in the company's chicken segment, and similar 11% year-over-year revenue growth in its pork segment.
Tyson's one-year return on investment is currently 76.5%, far exceeding the US food industry's average 22.5% one-year return. Its approximate 13 P/E ratio for the current fiscal year beats the food industry's average 17 P/E ratio for the same period, and surpasses those of major competitors Pilgrim's Pride (with a fiscal-year P/E around 18) and Hormel (around 25) by an even larger margin. Given these factors, the company's new access to the meat-hungry Chinese market, and its historical performance, until and unless ASFV makes a significant appearance in America's commercial porker population, Tyson is likely undervalued despite its strong 2019 gains -- and may offer excellent investment possibilities for the new year.
