After Smithfield Foods, Which of these Companies Is Next?

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With the news last week that Smithfield Foods (NYSE: SFD) was being purchased by Chinese company Shuanghai International Holdings for $4.7 billion, it has me wondering if other U.S. meat companies are going to be acquired by Chinese companies. The Smithfield Foods and Shuanghai deal could touch off a flurry of mergers and acquisitions in the space. That would bode well for shareholders of Tyson Foods (NYSE: TSN), Hormel Foods (NYSE: HRL), Pilgrim's Pride (NASDAQ: PPC), and Sanderson Farms (NASDAQ: SAFM).

Why the interest from the Chinese?

In China food safety has become an important issue. There have been concerns over tainted milk, and most recently there have been worries over bird flu. Chinese meat companies are anxious to acquire American know-how for their operations. The acquisition by Shuanghai won't be as much China coming into the U.S., but more of Americans going to China to teach the Chinese how best to run their operations.

For China's booming economy, meat producers are in a great position to deliver large quantities of meat if they can do so safely and in an environmentally friendly way. In China pork consumption has exploded as incomes have risen. China's rising incomes have increased the portion of meat on the Chinese dining room table and decreased the amount of rice and noodles.

Why buy Smithfield Foods?

Smithfield Foods is the world's largest pork producer and is famous for its Smithfield hams. Smithfield has developed a genetic strain that allows it to produce the leanest hogs in the marketplace. Shuanghai International is the largest pork producer in China, and this acquisition is fueled by Shuanghai's global ambitions.

Shuanghai imports all its slaughtering and processing equipment from the U.S. By purchasing Smithfield, the goal for Shuanghai is to increase the level and standard of food safety. Shuanghai was forced to publicly apologize in 2011 when illegal additives were found in its meat products. Since then, the company has pledged to focus on quality control. By acquiring Smithfield Foods, Shuanghai is looking to complete that process.

What about other U.S. meat companies?

Tyson Foods is engaged in the production and distribution of chicken, beef, pork and prepared foods. Tyson Foods is in the protein business, and we know that's what the Chinese are after right now. After the Smithfield Foods deal was announced, Tyson Foods hit a new 52-week high.

The focus at Tyson Foods has been on innovation to fuel the company's overall growth strategy. In the U.S., the prepared food market business is growing rapidly as more Americans opt for convenience. The company forecasts top line sales growth of 3% to 4% per year. Where the company has the most room for growth is in the international market. International sales are forecast to increase 12% to 16% per year.

Hormel Foods produces all kinds of meat products. Its meat products include fresh, frozen, cured, smoked, cooked and canned meats. Hormel also makes the infamous Spam product, and the company also produces many non-meat products including Skippy peanut butter. Hormel bought Skippy from Unilever in January for $700 million.

The company just recently missed its earnings expectations. Results also came in lower than last year's on higher grain costs, weaker turkey prices, and costs related to acquisition of Skippy peanut butter. Hormel gets half its revenue from its refrigerated foods segment. Analysts expect Hormel to earn $1.99 per share for 2013, and the company is forecasting earning $1.93 to $2.03 per share.

Pilgrim's Pride is a pure chicken grower. The company's primary operations are in the United States, Puerto Rico and Mexico. Pilgrim's Pride does export whole chickens and chicken parts to more than 100 countries thou.

Over the past year, chicken producers have been hit with high grain prices. Luckily for them, prices have come back down on favorable weather and record corn planting. This year's corn crop looks to be one of the largest on record if weather remains favorable. That will go straight to Pilgrim Pride's bottom line as feed costs go down. These lower costs boosted the company's EPS by 16.7% in the first quarter of this year compared to last year's first quarter.

Sanderson Farms is the company getting the most attention as a possible acquisition because it has the lowest market cap of the company's mentioned. The company is a pure-play on chicken like Pilgrim's Pride. Sanderson Farms provides chicken to Sysco and Buffalo Wild Wings and gets 20% of its revenues from exporting chickens.

Sanderson Farms is set to benefit like Pilgrim's Pride with lower input costs and improving chicken prices and margins. The company has tight controls and automation when it comes to hatcheries, feed mills, processing and distribution. That is how the company can maintain such consistency with its chicken. Sanderson just built a facility in Waco, Texas that can debone 1,250,000 chickens per week. Retail chicken prices are over 17% higher this year according to the USDA. Increased prices mean increased profits for chicken growers.

How do they all compare?

<table> <tbody> <tr> <td> </td> <td> <p><strong>Smithfield</strong></p> </td> <td> <p><strong>Tyson</strong></p> </td> <td> <p><strong>Hormel</strong></p> </td> <td> <p><strong>Pilgrim's Pride</strong></p> </td> <td> <p><strong>Sanderson</strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$4.57 billion</p> </td> <td> <p>$8.87 billion</p> </td> <td> <p>$10.55 billion</p> </td> <td> <p>$3.10 billion</p> </td> <td> <p>$1.59 billion</p> </td> </tr> <tr> <td> <p><strong>Revenue</strong></p> </td> <td> <p>$13.11 billion</p> </td> <td> <p>$33.50 billion</p> </td> <td> <p>$8.45 billion</p> </td> <td> <p>$8.27 billion</p> </td> <td> <p>$2.49 billion</p> </td> </tr> <tr> <td> <p><strong>Rev Growth</strong></p> </td> <td> <p>0.03</p> </td> <td> <p>0.02</p> </td> <td> <p>0.07</p> </td> <td> <p>0.08</p> </td> <td> <p>0.04</p> </td> </tr> <tr> <td> <p><strong>EBITDA</strong></p> </td> <td> <p>$807.90 million</p> </td> <td> <p>$1.70 billion</p> </td> <td> <p>$843.17 million</p> </td> <td> <p>$406.49 million</p> </td> <td> <p>$154.44 million</p> </td> </tr> <tr> <td> <p><strong>Gross Margin</strong></p> </td> <td> <p>0.11</p> </td> <td> <p>0.06</p> </td> <td> <p>0.16</p> </td> <td> <p>0.05</p> </td> <td> <p>0.07</p> </td> </tr> <tr> <td> <p><strong>Net Income</strong></p> </td> <td> <p>$233.60 million</p> </td> <td> <p>$529.00 million</p> </td> <td> <p>$499.00 million</p> </td> <td> <p>$189.64 million</p> </td> <td> <p>$53.88 million</p> </td> </tr> <tr> <td> <p><strong>Operating Margin</strong></p> </td> <td> <p>0.04</p> </td> <td> <p>0.04</p> </td> <td> <p>0.09</p> </td> <td> <p>0.03</p> </td> <td> <p>0.04</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>21.56</p> </td> <td> <p>17.15</p> </td> <td> <p>21.41</p> </td> <td> <p>16.34</p> </td> <td> <p>28.49</p> </td> </tr> </tbody> </table>

What's a fool to think?

All 5 companies are very similar with their financials. Tyson and Hormel both have a larger market cap than Smithfield and might be a stretch for a Chinese company to buy. Pilgrim's Pride and Sanderson Farms both have a smaller market cap than Smithfield and could be two good candidates. The trend worldwide is for a more protein-rich diet and that trend will benefit the meat producers. A fool couldn't go wrong being exposed to the sector.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool owns shares of Sanderson Farms. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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