Sizzling stocks for China's food revolution
Exploding demand for chicken and pork may mean big profits for these 3 companies.
By Michael Shulman
China likes to eat. Just ask the nervous employees of Smithfield Foods (SFD), the acquisition target of one of the largest food producers in China.
This potential acquisition is the tip of a new investing iceberg -- the growing demand for protein in China. As incomes increase for consumers in emerging economies, they eat more and more protein such as chicken and pork. In China, this increase in demand has led to massive increases in imports of everything from corn to processed chicken. Then there's the growing reality that China is slowly abandoning its one-child policy, and that will mean 40 million or more mouths to feed.
It all adds up to a secular change in the demand for protein and related foodstuffs. What should investors do? Think supply chain and these three companies pop to mind:
Archer Daniels Midland (ADM)
ADM is the most important grain and food processor in the U.S., the middleman between the farmer and the restaurant, grocery store or consumer staples company.
I like it right now because it is diversifying and adding global processing and distribution capacity with the cash-based acquisition of GrainCorp of Australia. That large country is closer to China and India than the U.S. The GrainCorp acquisition should be highly accretive, boosting profits and enabling ADM to expand rapidly into Asian markets due to GrainCorp's size. ADM is paying $3.4 billion for the company.
Monsanto is the world leader in seed technology. On May 13, Monsanto got a boost when the Supreme Court voted 9-0 to support Monsanto's seed patents. The decision means Monsanto has the right to stop farmers from saving seeds from patented genetically modified crops one season and planting them the next. Farmers must now buy those seeds from Monsanto.
Monsanto's first quarter 2013 numbers were great. Profits were up 20%, and consensus estimates are for 12% revenue growth in 2013. In 2014, look for 25% profit growth and continuing double-digit growth despite concerns about falling grain prices.
I like Monsanto right now for another reason -- the possibility that U.S. and EU trade talks will lead to a modification or end to the current restrictions on genetically engineered seeds.
BRF SA (BRFS)
The largest food processor in Brazil, BRFS controls more of the production chain than processors in the U.S. and Europe and is serving a huge population that is enjoying rapid movement into the middle class -- eating more and better food. More importantly, the company is a big exporter. More of those exports in the future will go to developing economies craving more protein in the form of frozen chicken. The company's largest export market today is the Middle East, but I see more and rapid growth in Asia, including China.
The company is followed by just four analysts, despite annual revenues north of $14 billion. BRFS hopes revenues will top $25 billion by 2015. It has higher profit margins than many food processors in the U.S. and Europe. The stock was around $14 a share a year ago due to currency issues, it is now above $23 with plenty of room to run.
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