Consumer Products

Tyson Could Gain From African Swine Fever and China's Pig Population Culling

Jon C. Ogg

It seems hard to imagine that an American company could have good news from China under the current circumstances. Apparently, the needs within the food chain may actually dominate politics and trade policies.

According to Credit Suisse, Tyson Foods Inc. (NYSE: TSN) is not being fully appreciated for its ability to help overcome the impact of the African swine fever outbreak on global meat supply chains over the next two years.

Credit Suisse’s Robert Moskow upgraded Tyson Foods to Outperform from Neutral and raised the price target to $96 from a prior $74.

What should stand out is that this call notes the lack of a supply-chain shock in recent history that compares to the magnitude of African swine flu. The report also cites a recent dramatic contraction in China’s national tally of pig herds. Even if U.S.-China trade disputes continue, other countries will need to import more meat from the United States to make up the difference in supplies.

Tyson is not considered an expensive stock by traditional measures. The Credit Suisse note signaled that the $96 target price assumes the stock’s price-to-earnings (P/E) ratio will improve to 13.5 from 12.5 (with a 10-year average of 11.2). This indicated that Tyson’s valuation would move closer to the packaged foods average of 15.8 as its earnings and margins are revised higher. One caveat noted in Moskow’s upgrade is that deflation in meat prices from excess domestic supply or export restrictions are the two biggest risks to his $96 target price.

The report further said:

We believe the ASF crisis will have a profound impact on global meat supplies for at least two years. The Chinese pig herd, which is 4.5 times the size of the U.S. herd, has contracted by 30%, and reduced the supply of global meat by 5%. No supply-shock event in recent history can compare to this one in terms of magnitude. But just using the much smaller outbreak of PED virus in 2014 as a benchmark, pork and chicken margins can easily return to the high end of Tyson’s historical ranges if not exceed them. In order to keep domestic meat prices from getting out of control, China will need to import more meat from around the world. Even if the U.S. trade dispute with China continues to restrict U.S. access directly, other countries exporting to China will need to import more U.S. meat to back fill their supplies.

Credit Suisse offers upside and downside targets on its reports. The firm’s Blue Sky Scenario went up to $106 from $81 and is based on a rebound in commodity markets through better supply/demand balance. The Grey Sky Scenario rose from $68 to $73, based on higher than anticipated pressure on chicken and beef margins.

Before considering that there will not be (or cannot be) exposure to the fast-spreading swine flu, note that Tyson’s CEO recently predicted that meat prices would be heading higher after China culled tens of millions of hogs to contain the disease. In a Wall Street Journal article, CEO Noel White pointed out that this even could lower global meat supplies by as much as 5% while the global demand for meat has been on the rise. White also noted that it may take years before the global supply balance is back in equilibrium.

While African swine fever is not harmful to humans, it can spread rapidly throughout pig populations and can kill pigs within 10 days. Tens of millions of pigs have been killed in China alone to combat the spread of this disease. A recent Washington Post report indicated several key issues as well, with outbreaks being detected in Cambodia, Vietnam and Mongolia, and that the virus was detected in some processed pork products from China that were intercepted at airports from Japan to Australia.

Tyson’s CEO also was quoted in the Wall Street Journal warning that it is very possible that at the rate that Asian swine fever spreads it could appear in the United States. For investors looking at a post-earnings Tyson, any major benefits to Tyson from swine fever should not be expected until late in the current fiscal year.

Credit Suisse is not alone in upgrading Tyson’s rating and target. Independent research firm Argus raised its rating to Buy from Hold on May 13, with a new $92 price target. The difference between that report and Credit Suisse’s report is that swine fever was not mentioned once. Argus noted that Tyson’s beef division is seeing especially strong demand and that it sees an increase in sales of prepared foods. The firm also referred to Tyson’s positive earnings surprises over the past four quarters as raising earnings expectations.

Tyson is also expected to be releasing its own vegan meat replacement products this summer.

Tyson shares were last seen up 2.4% at $81.50 on Tuesday, in a 52-week range of $49.77 to $81.87 and with a prior consensus target price of $82.79. It also carries a 1.84% dividend yield at the current share price, with close to a 25% earnings payout ratio based on current consensus earnings estimates.