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The low-cow, mad-carb portfolio
Will mad cow kill the Atkins diet craze? The early returns say no, but watch these 9 stocks to see which way the markets are leaning.
By Jon D. Markman
Its not often that two contradictory investment themes duke it out in the supermarket of public opinion and taste at the same time, but that is the meat of the matter today in grocery aisles and trading rooms across the country as we witness the battle of Mad Cow vs. Atkins.
In one corner, we have the challenger -- an investment theme fronted by consumers who fear that the discovery of bovine spongiform encephalopathy in a Washington state Holstein shows our protein food chain has been compromised and therefore should be shut down. In the far corner stands the current champ -- an investment theme fronted by people who believe a diet low in carbohydrates and high in protein, popularized by the late Dr. Robert Atkins, can keep them from getting fat as a pig.
Each theme logically argues against the other. If the beef-bashers are correct, it should be time to take a cue from Japan, Mexico and South Korea -- which have forbidden imports of U.S. beef -- and swap meatpacker stocks for shares of veggie processors like Fresh Del Monte Produce (FDP, news, msgs) or the la-di-dah organic grocery chain Whole Foods Market (WFMI, news, msgs). If the beef-eaters are right, then its time to take advantage of the current fear of frying and buy a lifetime supply of meat stocks.
Of course, there is a middle ground where all can dine and trade in peace, which I will propose in a moment. But first, lets examine whats at stake, so to speak, and consider the major players.
Protein craze goes mainstream
The food industry sells close to $600 billion worth of products in this country every year, and beef accounts for an impressive 8% to 10% of that. Tyson Foods (TSN, news, msgs), which entered the beef biz in a big way in 2001 by purchasing IBP Inc., slaughters 37,000 cattle daily to keep up the pace of its $10.2-billion division. The next largest beef-processor in America is Excel, a division of private conglomerate Cargill, with $8.7 billion in sales. Then comes Swift & Co., a private joint venture between investment firm Hicks Muse and food conglomerate ConAgra Foods (CAG, news, msgs), with $5.5 billion in sales. And last is Smithfield Foods (SFD, news, msgs), with $2.2 billion in sales.
The growing popularity of low-carbohydrate diets -- the Atkins books alone have sold 15 million copies over 20 years -- has intensified Americans interest in chowing more protein. The government reports that U.S. beef demand was up 10% in 2003, while chicken demand was up 8%. Egg sales are up as well, and an industry-wide lack of enough layers to satisfy demand from low-carb breakfasters has served to push egg prices to 20-year highs.
No longer on the nutritional fringe, the approach has gone mainstream. A Morgan Stanley survey of 2,500 consumers late last year found that low-carb diets touch 24% of consumers today -- a figure four times higher than prior estimates. The survey found that 19% of Americans say that they have tried a low-carb regimen, and 5% more say they live with someone who has. About 10% of Americans say they are on a low-carb diet now.
These diets are popular because they feed into the great American theme of instant gratification. If you follow all the rules, its pretty much a lock that you will lose 10 pounds in two weeks -- just like the ads say. And because the proteins with which you replace the carbs are more satisfying than most other dietetic fare, nutrition researchers have found that its an unusually easy regimen for people to stay on. Moreover, scientists have concluded that its not an unhealthy diet, despite allowing its adherents to basically ingest as much fat as they like.
Budweiser's smooth move
The really important thing investors need to know about the low-carb movement, however, is this: Morgan Stanleys research showed that even though half the people who try the diet quit after six weeks and nearly three out of four will quit after 12 weeks, about 30% of those say they will continue to watch their carbs (and eat more protein) afterwards. That matches up with 40% of people who say they limit their fat intake, and 40% of Americans who say they limit their sugar.
In summary, the low-carb approach appears to have leapt the tracks of status as just a fad and become an entrenched trend. And that means the nation's food companies have had to snap to attention. Budweiser (BUD, news, msgs) has been among the leaders -- creating a low-carb beer brand, called Michelob Ultra, last year and guiding it through clever marketing to a sensational 3% share of supermarket sales. Johnson & Johnson (JNJ, news, msgs) has benefited through a terrific sugar substitute called Splenda. And fast-food chains Subway, McDonalds (MCD, news, msgs) and Carls Jr. (CKR, news, msgs) have all introduced and begun heavily marketing low-carb menu options -- mostly either chicken wraps or hamburgers bundled in lettuce instead of buns. According to Morgan Stanley, sales of low-carb branded merchandise hit $520 million last year, compared to $120 million in 2002.
You might think that the discovery of mad cow in an animal fully integrated into the nations food supply would stop this trend dead in its tracks. After all, doctors say that humans can acquire a brain-destroying fatal illness by ingesting meat made from a bad cow -- and symptoms might not show up for years. Yet there appears to be no such widespread fear. Sales at hamburger joints Wendys International (WEN, news, msgs) and McDonalds have not slowed down a bit -- and steak chains also report no effect. In the smackdown match between dieting and disease, high-protein dieters have essentially decided that theyd just as soon die thin.
Of bakers and butchers
How to take advantage of the scare? You wouldnt buy ConAgra -- owner of a broad array of brands including Peter Pan peanut butter, Wolfgang Pucks pizzas and Chef Boyardee canned spaghetti -- for its relatively minor beef interests. And Cargill is private. So the focus for beef plays comes down to Tyson and Smithfield. It turns out each of these does a lot more than process cows, however. Smithfield earns most from extensive hog-processing operations. And while beef is Tysons most important product -- accounting for 42% of profits -- analysts point out that any shortfall in sales should be made up by its industry-leading chicken and pork divisions.
Advantage, Smithfield? Not so fast. Digging deeper, it seems that most of Smithfields beef comes from the slaughter of worn-out Holsteins -- that is, the exact dairy-cow species that is Patient 0 in Washington. Tyson fans, meanwhile, point out that their Arkansas-based company specializes in feedlot cattle and has long had strict guidelines against the use of spinal cords and brain matter in its hamburger meats. With a forward price-to-earnings multiple of 12.50 despite expected income growth of 14% or better, and price-to-book and price-to-sales multiples well below historic averages, I think a nod of the 10-gallon hat has to go to Tyson. A price around $17 ought to be achievable by the end of this year once the sectors psychology improves.
A few other companies also ought to have advantages stemming from both trends. Archer Daniels Midland (ADM, news, msgs) and Bunge (BG, news, msgs), two major U.S. grain processors, are expected to sell a lot more soy meal feed if the United States takes steps to ban the use of ground-up cattle in cattle feed. Sanderson Farms (SAFM, news, msgs) -- a small-cap chicken grower in Mississippi with strong cash flow, a P/E of 9.6 and a price-to-sales multiple of 0.59 -- should continue its campaign to grow about 15%-plus per year in a protein-hungry world. And microcap MGP Ingredients (MGPI, news, msgs) is an interesting play on the obverse side of the coin: It develops wheat-gluten and fiber products that major bakeries can use to lower the amount of net carbohydrates in their breads.
All of these stocks are at low simmer now as investors ponder the future of the group. Ill watch the stocks in the table below and report back on their progress at midyear.
| The Low-Cow, Mad-Carb Portfolio | | Company | Jan. 13 price | Market cap | P/E ratio | | Tyson Foods (TSN, news, msgs) | $13.43 | $4.7 B | 13.9 | | Sanderson Farms (SAFM, news, msgs) | $40.26 | $516 MM | 9.6 | | Anheuser-Busch (BUD, news, msgs) | $50.77 | $40.8 B | 20.6 | | Archer Daniels Midland (ADM, news, msgs) | $15.05 | $9.6 B | 19.7 | | Bunge (BG, news, msgs) | $33.75 | $3.4 B | 8.4 | | MGP Ingredients (MGPI, news, msgs) | $19.63 | $124 MM | - | | McDonald's (MCD, news, msgs) | $24.64 | $31.9 B | 31.0 | | CKE Restaurants (CKR, news, msgs) | $7.02 | $395 MM | - | | Johnson & Johnson (JNJ, news, msgs) | $52.25 | $152 B | 22.9 |
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Fine Print
Tyson provides a ton of information about itself at its Web site. So does Sanderson Farms. They both support a lot of recipe databases, such as this one. . . . Budweiser is using its new Michelob Ultra brand to sponsor womens golf, marathons and even a Broadway play. It has 95 calories and 2.6 grams of carbohydrates per 12-ounce serving. Whats impressive about Budweiser is how quick it was to figure out that this was a trend worth capitalizing on, then developing and quickly marketing a product which, for a light beer, really doesnt taste too bad. . . . Learn more about Bunge here. . . . Visit CKE Restaurants Carl's Jr. Web site to see what a low-carb burger looks like. . . . To learn more about MGP Ingredients contribution to low-carb breads, read all about its FiberStar 70 product here. . . . The low-carb industry now has an online newsletter tracking products and trends: Visit lowcarbiz.com. . . . Many readers have asked for an update on independent analyst Michael Belkin, whom I profiled on Oct. 22. Market prophet is battening down the hatches. Belkin said he expected the market to collapse in November or December, and it obviously did not. We corresponded last week, and he said he believes the market is still in the throes of a blow-off top that he expects to end as badly as the top in March 2000.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdm@oddpost.com. At the time of publication, Markman did not own or control accounts with positions in any securities mentioned in this column.
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