Tyson Foods Inc. says its pork business will benefit from the African swine fever that has slammed China, it just doesn’t know when.
For now, the company is projecting that the pork segment’s operating margin will surpass 6% for the fiscal year.
“It is difficult to predict when African swine fever might positively impact our pork business,” said Noel White, chief executive of Tyson TSN, -0.27% , according to a FactSet transcript. “However, we believe any financial benefit will likely occur in late 2019 or later.”
African swine fever is hitting China, and the meat industry, hard. For meat producers outside of China, the disease, which is deadly to animals, there’s opportunity.
See: The No. 1 reason to become a vegan - it’s not about your health
Pork production in China is expected to drop by 25% to 35%, according to Rabobank data quoted in The Wall Street Journal. China is expected to increase imports of other proteins.
Tyson stock has soared nearly 45% for the year to date, far outpacing the S&P 500 index SPX, -1.65% (up 15.1%), the Invesco Dynamic Food & Beverage ETF PBJ, -1.34% (up 14%), and the Dow Jones Industrial Average DJIA, -1.79% (up 11.7%).
“News of African Swine Fever in China, along with the increased slaughter capacity in the United States, had a near-term impact of driving up hog costs that initially outpaced the value of pork,” said White. “We’re achieving reasonable returns despite the headwinds while improving our spread to the USDA industry benchmarks versus a year ago.”
African swine fever gave Tyson’s chicken business a bump, and positioned the company well for contract discussion for this year and next, according to White.
“On the positive side, we expects African swine fever to benefit the chicken and beef segments next year (the company’s two biggest segments by revenue, by far),” wrote J.P. Morgan analysts in a note. But, African swine fever could hurt the pork and prepared foods segment margins and potentially hit U.S. hog herds.
J.P. Morgan rates Tyson shares neutral with a $73 price target, up from $71.
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White said on the call that Tyson expects the costs for the prepared foods business to rise in the third and fourth quarters as beef and pork prices increase.
“Our plan is to recover these additional costs through pricing, but it will take some time,” he said. “As a result, we’re adjusting our annual outlook for this segment to be between 10% and 12% return on sales.”
White talked about the “unprecedented” nature of the African swine fever event and the “potential to change global protein production and consumption patterns,” including in North America.
Tyson also talked about the new DNA technology that it will be using to track the animal origins of its Open Prairie Natural brand of Angus beef. The technology is meant to assure customers that Open Prairie Natural product is sourced from cattle that are raised to dietary specifics such as no added hormones.
“Global demand for high-quality beef continues to be strong, and we expect our international beef sales to grow in the second half of the fiscal year, contributing the beef segment’s margins of approximately 7% for the year,” White said.
Demand for meatless options has also been growing, with Beyond Meat Inc. soaring 163% when it began publicly trading, and competition in the meatless category heating up.
See: Beyond Meat goes public with a bang: 5 things to know about the plant-based meat maker
Tyson hasn’t neglected these new dining preferences. Through Tyson Innovation Labs, it introduced Yappah, a brand of protein crisps made with recycled vegetable- and grain-based ingredients. And through a wholly-owned subsidiary, Tyson Ventures, it has invested in Future Meat, meat produced in a lab.
“We want to make the existing product on the shelves obsolete,” Beyond Meat’s Chief Executive Ethan Brown told MarketWatch.
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