BOSTON (TheStreet) -- Slim Jims, Spam and chicken burritos may not get any cheaper in the checkout aisle, but the companies that make them are about to reap big profits as the price of corn -- a main ingredient in the products and in feed -- falls.Corn commodities were trading at record levels a few weeks ago amid reports of low supplies and an outlook for more of the same. That led to talk of a knock-on effect with higher prices for everything from soft drinks to steak, and thinner profits for food and beverage companies.
Hormel Foods ( HRL), known for its canned chili and Spam, has seen its shares rise 3% last week and 7% in the past three months, benefiting from investors' interest in consumer staples. It could do even better due to the new interest in corn and how the lower prices will drop to the bottom line as it is a heavy user of corn in its processed foods including commodity meats or value-added packaged products such as its Jennie-O Turkey brand line. Hormel has already been posting above-average results compared with other meat processors. Standard & Poor's has a "sell" rating on the company primarily due to Hormel's sensitivity to changes in commodities, but given the USDA's report, that could change. Nevertheless, its analysts said in a June 25 research report that "the company will be looking for opportunities to make strategic acquisitions. Over time, we expect Hormel to be able to increase the importance of non-U.S. sales, including a larger presence in some Asian markets," which are growing much faster as the rest of the world adopts American eating habits.
Poultry producer Smithfield Foods' ( SFD) most recent quarterly profit topped analysts' expectations and at the time, Chief Executive Officer Larry Pope said the company has hedged 50% of its feed-grain costs for the year at prices "well below the current market," which should help boost earnings for the balance of the year. Smithfield is also benefiting from its international business, including China, Japan, Mexico, Russia and Canada, where strong economies have helped maintain profits. Smithfield also just announced a $150 million share-buyback program, sure to contribute to share-price appreciation. The company's shares have risen 9.4% this year and 55% over the past 12 months, including 3% in the past week. But Morningstar analyst Jeremy Cohen is unmoved. He said in a June 21 report that Smithfield's scale has "not buffered its cash flows from volatile swings in commodity prices, leaving the company with no economic moat" and therefore open to losing market share in competitive times. And he adds that "even if the firm improves its health and operations, we do not think Smithfield's business will ever be stable. There are far too many outside factors affecting both its production and sales that can change on a whim, making Smithfield a risky investment," said Cohen. But in a Standard & Poor's review of analyst ratings, Smithfield found a much more optimistic outlook as it was given five "buys," one "buy/hold," nine "holds" and one "weak/hold."
A speculative investor should take a look at Ralcorp Holdings ( RAH), which has been in the sights of much-bigger ConAgra as a takeover candidate. So it that comes about, investors could make money, with or without the benefit of favorable corn prices. ConAgra said in early may that it had made a $4.9 billion offer on the company, but was rebuffed by the Ralcorp board. Ralcorp's chairman said two weeks ago that the company is not currently in talks with anyone. Standard & Poor's thinks ConAgra could make a new, higher offer. "With a relatively low interest-rate environment, and the prospect of cost synergies, we think (ConAgra) will be willing to offer at least $90 per (Ralcorp) share," which would be a similar price-to-earnings ratio to a recent average for a group of food stocks. Its shares are currently at $87.10. Ralcorp acquired the Post Foods cereal business in August 2008, and also produces a variety of foods that are sold under individual labels of various grocery, mass merchandise and drug store retailers. According to Standard & Poor's review of analysts' opinions, Ralcorp should earn a healthy $5.48 per share for fiscal 2011, and that that will grow by 8% in 2012. According to S&P, analysts have given it two "buy" ratings, two "buy/holds," seven "holds" and one "weak/hold" rating. Ralcorp has a $4.8 billion market value. Its shares are up 34% this year and 60% over the past 12 months.