Chicken is Booming

For decades, doctors and nutritionists have been advising us to lay off of beef and pork, in favor of chicken and fish instead. It looks like we can now add accountants to the list of proponents urging us to go chicken.

Amidst sky-high cattle and pork prices, cheaper and more plentiful chicken is soaring in demand.

“We’re sold out!”, exclaimed Ed Fryar, CEO of Ozark out of Arkansas, which processes 3 million pounds of chicken meat a week. “When I looked at 2014, I didn’t anticipate demand being as strong as it is. This is going to be a really good year for the industry.”

The nation’s top chicken producing companies have beaten the S&P 500, gaining as much as 80 to 120% in share price over the past year compared to the broader market’s 17%. It looks like chicken is not only a healthier choice for our physical and financial health, but for our investment portfolios’ wealth as well.

The Battle of the Meats

The recent surge in chicken demand comes down to record beef prices, which have grown the fastest since 2010-11 and are now at their highest levels on record, as noted in CME futures prices below.

Source: TradingCharts.com

As always, there are multiple factors perfectly aligned to elevate beef and pork prices. Years of drought and poor grazing conditions have forced ranchers to turn to feed in greater measure, raising the cost of feed and the cost going into each animal. Ranchers had also been forced to slaughter more cattle and hogs in 2012 and early 2013 to keep their costs down.

This has produced the smallest cattle and hog herds in 63 years. A hog virus that strikes piglets has spread to 28 states, further thinning herds and forcing up prices.

Adding to those upward price pressures is a growing demand for beef the world over, including China – home to 1.25 billion people who are rapidly rising through the wealth chain, and whose diets are rapidly rising through the food chain as well. Over the past decades, Chinese consumers have been adding beef to their diets in growing measure with each passing year.

While Americans consume 235 pounds of meat annually (around 470 hamburgers per year per person – averaging more than a burger a day), the Chinese consume about half that amount, or 120 pounds per person per year.

But when multiplied by the overall population we get a different outcome. Where America’s 319 million people consume 74.965 billion pounds of meat per year, China’s 1.35 billion people consume 162 billion pounds of meat per year – more than double. Part of the growing Chinese demand for meat was induced by America itself through the enormous success of U.S. fast food restaurants such as McDonald’s.

Yet pork consumption in China far outpaces beef, and is having an impact on global hog supplies and prices. In 2013, China consumed more than half of the world’s 107 million tons of pork, or more than 107 billion pounds. The demand for pork in China is so high that Chinese company Shuanghui International Holdings in 2013 bought the world’s largest pork producer, Smithfield Foods of Virginia.

Another year of drought conditions in major beef producing regions of America and Australia are expected to further reduce the supply and increase the cost of beef. Canada’s hard winter has also reduced the supply and increased the price of feed, while Argentina is reducing beef exports in favor of domestic markets to keep internal prices down.

Chicken suppliers, therefore, are benefitting from the increasing prices and decreasing supplies plaguing the beef and pork industries around the world. Even in China, Yum Brands’ KFC chicken restaurants are outpacing McDonald’s in growth and sales.

As cows, hogs and chickens battle it out for entrée supremacy, Donnie King, the president of America’s largest meat processor Tyson Foods declared, “Chicken will be the clear winner this year. It’s the cheapest protein” of the three.

Counting Their Chickens

Chicken producers are confidently counting their chickens before they’ve even hatched. It’s going to be another great year for them. “We suspect you’ll see production expand versus 2013 in the coming months,” David Maloni, a principal at the American Restaurant Association in Sarasota, Florida anticipates. “In the near term, we’ll go higher.”

Already the number of broiler eggs set in incubators reached 202.1 million in the first week of April, the most since last July. Chicken producers have a much easier time answering to demand than beef and pork producers have. Where it takes up to two years to raise cattle for slaughter plus tons of feed, it takes just 6 to 8 weeks to raise a chicken, and their feed is just chicken scratch.

Yet we mustn’t expect chicken producers to run out and buy too many new incubators, with the U.S. Department of Agriculture estimating just a 1.8% gain in chicken supply this year compared to a 2.1% gain in 2013. Still more chickens than last year, but expansion is being hemmed in.

Why? Because chicken producers want to make sure prices remain where they are, rather than risk adding too much extra capacity only to have prices fall back down. “The chicken industry has wanted to see this proof in higher prices before they were willing to increase supply,” explained Will Sawyer, a vice president at Rabobank in New York.

Boneless, skinless chicken breasts are already up 23 percent this year at $1.5586 a pound, their highest spring-season price since 2004. Prices could climb another 33 percent to $2 by the summer due to supply bottlenecks, informed National Chicken Council economist Bill Roenigk.

Feeding on Chickens in More Ways than One

Investors looking to capitalize on the transition from beef to poultry can do more than save money by eating chicken instead of beef, they can grow their portfolios on chicken meat as well.

While some chicken producers and servers including KFC’s parent company Yum Brands have simply kept pace with the S&P 500 over the past year, most have beaten the broad market, a trend which is expected to continue.

Source: BigCharts.com

As per the graph above, two chicken producers in particular have vastly outperformed the broader market over the past year, including:

• Tyson Foods (NYSE: TSN) – This Springdale, Arkansas-based $14.5 billion large cap produces, distributes, and markets chicken, beef, pork, prepared foods worldwide. The company’s chicken segment breeds and raises chickens, and later processes them into fresh, frozen, and value-added chicken products. The company markets and sells its products to grocers, meat distributors, warehouse club stores, military commissaries, industrial food processing companies, chain restaurants and international export companies.

Its $34.77 billion in revenues equates to 238% of its market cap, with an EBITDA (earnings before interest, taxes, depreciation and amortization) of $2 billion or 5.7% of its revenues, return on assets of 7.82% and return on equity of 15.00% – far better than most S&P 500 companies in all metrics.

• Pilgrim’s Pride Corporation (Nasdaq: PPC) – This Greeley, Colorado-based $5.56 billion mid cap produces, processes, markets and distributes fresh, frozen and value-added chicken products to restaurants, grocers and wholesalers in the U.S., Mexico and Puerto Rico, as well as exporting to nearly 100 international markets. The company’s concentration on chicken compared to Tyson’s diversification into other meats has allowed PPC stock to outperform Tyson’s and most meat producers over the past year, as noted in the graph above.

PPC’s $8.41 billion in revenues equates to 151% of its market cap, with an EBITDA of $805.74 million or 9.58% of its revenues – almost double Tyson’s rate – while PPC’s return on assets of 13.65% and return on equity of 45.78% are up to three times better than Tyson’s.

As for valuations, their stock prices at $42.93 and $21.37 respectively may be slightly worse than the S&P on a book value basis, but they are undervalued when growth potential is compared, as noted below.

With future sales expected to continue growing, poultry producer stocks are poised to continue rising, representing good value on multiple metrics. As beef eaters cross the road to chicken restaurants to save their budgets and lower their cholesterol levels, investors are counting their chicken holdings to plump up their portfolios.

Joseph Cafariello