Seeking Alpha: Zhongpin - Market Has Doubts About Proposed Deal

I've had a love/hate relationship with China'a Zhongpin (HOGS) for some time now. I love emerging market food stories, and I believe ongoing consolidation in meat processing in China plays into this company's hands. What I don't love, though, is the company's ongoing capacity additions in an arguably already over-built market, to say nothing of the company's emphasis on selling through company-owned stores.

With Tuesday's developments, though, this story may be close to its final squeal.

An Appealing Bid …Maybe
Shortly after the open on Tuesday, Zhongpin announced that it had received a letter from the company chairman Xianfu Zhu offering to take the company private for $13.50 per share in cash. At the time of the letter, Mr. Zhu already owned more than 17% of the company's shares.

Please read the full piece here:
Zhongpin - Market Has Doubts About Proposed Deal

Investopedia: Zhongpin Takes Investors To The Abattoir

Zhongpin (Nasdaq:HOGS) is proving to be a tough company to love. While I still like the opportunity offered by China's fourth largest pork processor, this quarter shows once again that commodity markets are unpredictable and sometimes irrationally competitive. Though Zhongpin continues to offer solid long-term prospects to patient investors, more conservative investors may want to take their chances instead with company's looking to exploit China's protein demand through the export markets.

A Disappointing End to 2011  
Zhongpin doesn't necessarily make analysis easy on investors, as they did not print quarterly numbers for the fourth quarter results. Luckily, backing out the results isn't all that difficult.

Please read more here:
http://stocks.investopedia.com/stock-analysis/2012/Zhongpin-Takes-Investors-To-The-Abattoir-HOGS-WMT-SFD-TSN0315.aspx

Investopedia: Zhongpin Could Be Hog Heaven For Investors

Although the scandals surrounding small Chinese stocks in 2010 and 2011 never crept as high as the huge companies like Petrochina (NYSE:PTR) or Lenovo (OTCBB:LNVGY.PK), Zhongpin (Nasdaq:HOGS) did come in for closer scrutiny and doubt. Although history suggests investors can never completely trust any company, hog producer Zhongpin may yet be a sound strategy for benefiting from improving standards of living in the PRC.

The Number Four Player in the Protein of Choice  
Zhongpin is the fourth-largest pork processor/packer in China, but holds less than 1% share of the hog slaughter market and the larger players will scarcely familiar to most readers in North America (Shanghui, China Yurun, and People's Food). With the top five producers holding less than 10% share, the Chinese market is a far cry from the highly concentrated U.S. market that is largely dominated by companies like Tyson (NYSE:TSN), Smithfield (Nasdaq:SFD), Seaboard (AMEX:SEB), Swift (owned by Brazil's JBS) and Cargill, where the top four companies have over 60% of the market.

Please read more here:
http://stocks.investopedia.com/stock-analysis/2012/Zhongpin-Could-Be-Hog-Heaven-For-Investors-HOGS-TSN-SFD-SEB0116.aspx

Investopedia: Smithfield's Leverage High On The Hog

Take an unpredictable and cyclical business with narrow margins and then layer on a big dollop of debt and let the fun ensue. That's basically the recipe for Smithfield Foods (NYSE: SFD), for while this company is both the largest pork producer in the country and a well-run agribusiness in general, the combination of a low-margin business and a high-debt balance sheet makes this a never-boring play on protein.
  First Quarter Results a Little Undercooked
Smithfield reported that sales rose a little less than 7% for the fiscal first quarter, with the total revenue figure coming in just a couple of percentage points below the average estimate. Sales performance was driven by the pork business (as it virtually always is), and pork revenue rose by 7.6%. Like Hormel (NYSE: HRL), Smithfield understands the virtues of a solid branded/packaged product business, and although packaged pork sales growth trailed the company average (6.4% versus 6.7%), it's still a significant contributor.

Fresh pork saw nearly 9% growth, though volume was down about 2%. Margins were at the high end of the company's historical range. On the packaged side, margins too were above normal levels and the company's sales growth was a byproduct of pricing (up 8%) offset by volume (down 1%).



To read the full article, click below:
http://stocks.investopedia.com/stock-analysis/2011/Smithfields-Leverage-High-On-The-Hog-SFD-TSN-HRL-OINK-HOGS-SLE-CAG0909.aspx

Investopedia: Don't Get Piggish With Smithfield Foods

Protein stocks can be some of the most irritating stocks for an individual to consider. So much of what determines success at companies like Smithfield (NYSE:SFD), Tyson (NYSE:TSN), and Pilgrim's Pride (NYSE:PPC) is out of their control and all but impossible to predict. What's more, successful trading often demands selling when things look great and buying when things are terrible - old advice to be sure, but nevertheless still hard for many investors to follow. 

With Smithfield Foods posting its first full-year profit in a few years, and the stock up nicely relative to the S&P 500 over the last two years, investors might be wise to question whether this is a stock they want to hold for the full cycle or whether it may be time to move on to greener pastures. While protein consumption seems to be on an inexorable climb around the world, agriculture is still unpredictable and protein stocks are still tough candidates for long-term sleep-well-at-night investing.

A Good End To The Year

Smithfield Foods certainly brought home some good results for the end of its fiscal year. Revenue rose more than 7%, as Packaged Meat pushed Pork Processing to a double-digit increase and offset weaker performance in Hog Production. One potential concern comes from the volume figures - across the board volume was weak, as fresh pork volume dropped 9%, packaged meat volume fell 2%, and hog production volume fell 9%.


The full piece can be read for free at Investopedia:
http://stocks.investopedia.com/stock-analysis/2011/Dont-Get-Piggish-With-Smithfield-Foods-SFD-TSN-CORN-HOGS-OINK-SEB-HRL0620.aspx

(Repost) Investopedia: Does Tyson Deserve Better?

Tyson (NYSE:TSN) is a tricky stock. Commodity food producers like Tyson almost never get the valuation that packaged food companies like Hormel (NYSE:HRL) and General Mills (NYSE:GIS) carry. Even with that being said, though, Tyson has shown itself to be relatively less volatile than other protein producers but still gets no premium for that distinction. If Tyson can somehow maintain its current levels of free cash flow production, this is a stock that value investors should seriously consider.


Very Mixed Performance for Q2
Tyson's fiscal second quarter was a real mixed bag - solid top-line performance, but not a lot of great news on profitability. Tyson reported that revenue grew about 12% in the second quarter, comfortably above the average analyst estimate. Growth was consistently positive across the board, with the company's large beef operations showing 19% revenue growth and the pork business jumping 26%. Even as a laggard, the poultry business was still up 10%.

Profits were not nearly so solid. Gross margin slid to 6.7% from 8.2% a year earlier; not a surprise, given the increase in grain, energy, packaging and other inputs. Operating income fell 12% from last year, and the operating margin compressed by 1.2%. Although operating income in the pork segment more than doubled (and margins were better than 10%), the profit in beef fell by a quarter and poultry income dropped nearly 68%.


To read the full article, follow the link:
http://stocks.investopedia.com/stock-analysis/2011/Does-Tyson-Deserve-Better-TSN-HRL-SFD-SAFM-PPC0512.aspx

Today Tunisia, Tomorrow Egypt?

High food prices have been getting a lot of attention lately, and they may have actually claimed a government. While it might be simplistic to tie the populist revolt in Tunisia (the president of 23 years has fled the country) to food, it certainly played a role. After all, the proximate cause of the protests that ultimately forced the president from power was the self-immolation of an unemployed college graduate upset that Tunisian police were blocking him from selling vegetables without a permit.

Now, Tunisia had plenty of other problems and it may well have been only a matter of time before “something” set off the powder keg. But that doesn't mean that there isn't a lot of potential trouble stirring because of food. The Indonesian president is encouraging citizens to grow their own chilli peppers, the Indian cabinet is supposedly having high-level meetings about the price of onions, and South Korea has released some emergency stores of cabbage, pork, fish, and vegetables according to the Financial Times.

“Please Sir, I Want Some More”

Why all the fuss over food? After all, Americans spend only about 7% of their budget on food. Well, in Thailand percentage is 26%, in Nigeria the number is about 50%, and in Tanzania its 71%. Consequently, a 10% rise in food prices is an annoyance to Americans, but a crisis to a large percentage of the world's inhabitants.

Unfortunately, trouble is stirring. Bad weather has wreaked havoc on crops in countries as diverse as Australia, Russia, and Pakistan this year, and there may be many more countries that have problems (or problem areas) that just don't crack the international news. On top of that, crop yields in South America have been disappointing in many recent years, so even a high-producing area cannot always be relied upon.

That has translated into sky-high prices for corn, soybeans, and wheat, and rice is on the way up. That, in turn, is wreaking havoc in a lot of countries. China is resorting to odd ploys like allowing trucks carrying vegetables to avoid tolls in the hopes of getting more produce to city markets. Other countries face a tough choice – try to fight inflation with higher rates and risk killing economic growth, or let food prices rise even higher and threaten the stability of the country. Making matters worse, it's unclear whether raising interest rates will help fight food price inflation – food prices are high because there is too little of it and interest rates don't change people's basic daily nutrition needs or produce sacks of wheat.

No Crisis Goes Wasted...

Of course, some folks cannot let a good crisis go to waste. One of the sillier notions is that these higher food prices are a direct consequence of the Fed's latest round of quantitative easing.

Uh … right.

Okay, I'm willing to go along with the idea that QE in the U.S. has led to some global inflation. But I'll need one of these demagogues to explain to me how Bernanke's moves lead to bad weather in Russia or Australia. Likewise, I'll need to see a Glen Beck-style flowchart for me to understand how easy money in the U.S. is perpetuating the La Nina weather phenomenon or the volcanic activity in eastern Russia that is messing with global weather patterns.

If the weather stays bad (and I don't know anywhere near enough meteorological science to figure that one out), the food situation will get even worse. That could be potentially explosive news for the leadership in Egypt, Indonesia, India, Algeria, Pakistan, Venezuela, and a host of African countries. It could even cause trouble in relatively stable countries like Turkey or Indonesia – if people are starving (or facing serious budget problems because of food prices), it is a lot easier for radicals to capture hearts and minds, particularly if they promise to feed their new converts.

Simply put, a lot of countries are going to face the reality that food security and national security are one in the same at the margins.

Solutions In The Seeds?

Maybe this doesn't reach the level of a Malthusian nightmare, but this latest bout of food insecurity might just lead some countries to some very difficult decisions. In the United States we have the luxury of fretting about organic foods, shopping at Whole Foods (Nasdaq: WFMI), and manufacturing fears about the hybrid seeds sold by Monsanto (NYSE: MON), Syngenta (NYSE: SYT), and DuPont (NYSE: DD).

But can Egypt or Pakistan afford the same luxury? If Monsanto seeds can boost yields by 10%, you could argue there is a moral obligation to use them. Sure, there are plenty of other problems with agriculture in much of the developing world – depleted soils, inadequate roads and logistics, lack of access to credit and advanced farming techniques – but hybrid seeds offer at least one potential solution.

So, what does all of this mean for investors?

If you're playing the commodity markets, these are wild times. Likewise, a lot of food companies, particularly those leveraged to emerging economies, have gotten a lot of attention. Zhongpin (Nasdaq: HOGS) and Cresud (Nasdaq: CRESY) are near their highs, as are the stocks of companies that hold the promise of improving food production. Here I'm thinking of names like Potash (NYSE: POT), Yara (Nasdaq: YARIY), Deere (NYSE: DE), and the until-recently-under-performing Monsanto.

In point of fact, a lot of these stocks are already near their highs. That doesn't mean that they won't go higher, though. I would be a little careful about owning meat producers, as many are vulnerable to higher feed costs (corn and soybeans), but it looks like a good time to be in grains, seeds, fertilizer, and processing/storage.

Beyond the food stocks, investors may want to keep a cautious eye on certain parts of the emerging markets. For countries like Brazil, China, and Turkey, these higher food prices are likely just a massive headache for the respective governments and will complicate their efforts to balance growth, inflation, and domestic harmony. For countries like Pakistan and Egypt, though, the consequences could be quite a bit higher and investors may want to tread carefully with the stocks and bonds of these countries.

History says that weather and crop yields will bounce back. Eventually the weather will settle down, crop yields will soar, and people will talk again about record-low prices for corn and soybeans. I have no idea “when”, though, and high food prices (and the resulting chaos) could be in the news for a while longer, perhaps even years. In the meantime, this is just another factor for investors to digest and discount – there is clearly an opportunity to play food stocks, but there is also the potential political chaos in the emerging markets to consider, as well as lower-growth and political/economic fallout in many of the most attractive emerging markets. 

Disclosure - I own shares of Monsanto
(apologies for not realizing  for a couple of days that I had failed to include this disclaimer...)  

Check Out Adecoagro

It probably didn't get much attention during the week, but I noticed an interesting F-1 filing during the week. Adecoagro filed to go public, and I'd suggest anybody with an interest in the farming industry, or a desire to invest in farming operations, take a look. It's a long read, though, so I can't hope to give more than a high-level view.

Who And What It Is

Adecoagro is active in farming, cattle, dairy, sugar, and ethanol in Argentina, Brazil, and Uruguay. The company controls 287K acres, spread over 21 farms in Argentina, 15 in Brazil, and 2 in Uruguay. In addition, the company has 3 rice processing facilities, a 47K+ liter dairy operation, 2 coffee processing plants, 7 grain conditioning/storage facilities, and 2 sugar and ethanol mills in Brazil with 5.2M ton crush capacity.

A bit less than half of the company's land is suitable for crop farming, while about one-third of it is used in cattle-raising. Not surprising for a South American ag company, soybeans make up more than half of Adecoagro's crop production.

Also worth mentioning is that George Soros (or rather, a company owned and controlled by him) owns about one-third of the company.

How It's Doing

Okay, that's the quick summary of what they are. How is Adecoagro doing? A quick read of the F-1 suggests that the company might be going public more to cash in on the buzz over agriculture (and the lack of investable plays) than to exploit solid financials. The company's free cash flow production has been lousy for a years now, and the company's crop yields have been very dicey – while the company has seen a good rebound through the first nine months, 2009 and 2008 were terrible. At least the company's balance sheet is in decent shape – for an ag company, the debt-equity ratio of about two-thirds isn't bad.

All in all, Adecoagro is a company I'm going to try to pay attention to going forward. I haven't dug into the numbers enough yet, but I suspect there is ample room for better financial performance, particularly given the disappointing yields of 2009 and 2008. What's more, it will be a publicly-traded ag company easily bought and sold in the U.S. and that is quite rare.

A Shopping List

On a global basis, there are ample publicly-traded ag companies. In Latin America, there Marfrig, BrasilAgro, Cresud (Nasdaq: CRESY), SLC Agricola, and San Martinho. Of those, only Cresud is listed in the U.S., though some of these ADRs have decent volume (like Marfrig) and trading in countries like Brazil is getting easier and easier.

Of course, there other options around the world as well. China Agri-Industries, China Yurun, Mengniu, Zhongpin (Nasdaq: HOGS), Astra Agro Lestar, Golden Agri-Resources, and Indofood Agri are all worth at least a look, and there are more than a half-dozen palm oil companies of notable size. And then there are Viterra and Canada's Alliance Grain Traders – both of which are perhaps a little easier for U.S. investors to follow.

Whew... a long list to be sure, but I figure anybody who shares my near-obsessive interest in farmland investments might find it to be useful. But it's interesting to me how relatively few options there are that are listed on U.S. exchanges – beyond Bunge (NYSE: BG) and ADM (NYSE: ADM), you pretty much have to look at second-level plays like fertilizer companies (like Potash (NYSE: POT)) or seed companies (like Monsanto (NYSE: MON)).

Maybe Wait For A Pullback?
Given the big spike in food prices, and the rampant media attention that has gone with it, food is a hot space now. Consequently, investors should not expect to find all that many bargains in the space. Companies like Zhongpin and Mengniu have interesting long-term prospects, and companies like Alliance Grain would be interesting on pullbacks, but there are a lot of valuations in the space today that probably won't be sustainable. That leaves investors looking at riskier plays like Monsanto if they want bargains.

So, if you share my interest in the food and ag sector, I strongly suggest looking up Adecoagro's F-1 on Edgar. It's a good read and even if you aren't interested in the company, it can be a good resource for those wanting to learn more about the sector and South American farming in particular.

Disclosure – I own shares of Monsanto

Update - Forgot to mention ... Adecoagro is looking to raise about $400M in its IPO and will trade under the symbol "AGRO".

Smithfield's Good Times Won't Last

This has been a good year for pork and beef producers, particularly since the summer months. Stocks like Smithfield (NYSE:SFD), Tyson (NYSE:TSN), Hormel (NYSE:HRL) and Zhongpin (Nasdaq:HOGS) have all seen double-digit stock appreciation and have beaten the market by a pretty healthy margin. Unfortunately, history strongly suggests that these good times will not last, so investors need to really give careful thought to whether they want to jump on board at this point in the cycle.

A Quarter that was Good Enough
Although the world's biggest hog raiser and processor did miss the consensus top line estimate, Smithfield nevertheless did have a respectable second quarter report. Revenue rose 11% to just under $3 billion, with a big jump in revenue from hog production and double-digit growth overall in the pork business.

Profitability is where the story really gets good for this quarter. Gross margin more than doubled from the year-ago period, and operating profit rose substantially. While corn prices are at the highest levels since the summer of 2008, and corn is a major component of feed costs which are a major component of Smithfield's costs, the company nevertheless has a favorable grain cost position at present. That allowed the company to earn a record per-head profit of $16 in the fresh pork business. 


Please click below for the full piece:
http://stocks.investopedia.com/stock-analysis/2010/Smithfields-Good-Times-Wont-Last-SFD-TSN-HRL-HOGS-OINK-WMT-TGT1213.aspx

Should Investors Put Hormel On The Table?

Hormel (NYSE:HRL) is an odd company. On one hand, it is difficult to find sustained success investing in large North American food companies, particularly those that are very vulnerable to commodity prices. On the other hand, Hormel does what so very few protein-focused food companies ever manage to do - the company has successfully diversified itself into a wide range of products and produces an ROIC that stands out within the industry and actually exceeds that of the average S&P 500 company. 

A Quarter with Some Gristle
Hormel ended its fiscal year with a good news/bad news type of quarter. Top line reported growth of 23% certainly captures an investor's eye relatively easily. Backing that up, volume growth of 14% is quite good, and the 9% improvement in mix and pricing is not bad either. While this quarter did have an extra week in it, that is just a 7.7% tailwind, so clearly the company has some real growth even on a stricter apples-to-apples basis. 


Please follow the link for the full piece:
http://stocks.investopedia.com/stock-analysis/2010/Should-Investors-Put-Hormel-On-The-Plate-HRL-SFD-CPB-KFT-CAG-HOGS-PPC1125.aspx

Tyson Still Hard To Digest

Not all food stocks are equal. Companies like Kraft (NYSE:KFT) and Kellogg (NYSE:K) offer a certain level of stability because of their brand value and extensive product offerings, but meat producers like Tyson (NYSE:TSN) do not. With Tyson there are constant worries about oversupply, feed costs and export markets - issues that just by and large do not figure into the packaged goods companies. This June quarter is a good microcosm of that - although Tyson did deliver a solid result, worries about the next quarter are likely to keep a lid on the stock. 

The Quarter That Was
Tyson's revenue beat the average estimate by nearly $200 million, as it grew almost 12% to $7.4 billion. While the company's pork business was the growth leader (up 49% to $1.2 billion), the overall leader in terms of scale was once again the beef business, which grew more than 15% to $3.1 billion.

Profitability was quite a bit better this quarter, as gross profits jumped about 60% from the year-ago level. Tyson managed to maintain this leverage throughout the operating structure, leading to overall operating income growth of almost 84%. On a segment basis, the beef business was a standout - more than doubling to $176 million, while poultry operating profits climbed 30% to $186 million. (For more, see The Bottom Line On Margins.)
To read the full text of this article, click below:
http://stocks.investopedia.com/stock-analysis/2010/Tyson-Still-Hard-To-Digest-TSN-KFT-K-PPC-SAFM-HOGS-CRESY0810.aspx

Meaty Results From Zhongpin and Tyson

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. 

http://stocks.investopedia.com/stock-analysis/2010/Meaty-Results-From-Zhongpin-And-Tyson-TSN-HOGS-SFD-MCD-YUM-PEP-KFT0512.aspx