Companies Getting Rich on Slim Jims, Spam

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.

But that got turned around Friday, surprising commodities experts, when the U.S. Department of Agriculture reported higher inventories and much more corn being grown in the heartland than had been expected. What's more, the government gave a more optimistic outlook on the pricing of feed grains.

"It was unusual, truly a surprise to people," said Sal Gilbertie, chief investment officer of the Teucrium Corn Fund ( CORN).

And that sets up some big profit opportunities at companies because lower corn prices will result in wider profit margins. And we're not talking chicken feed. As a direct result of the government's report, Goldman Sachs analysts slashed their forecast for corn and wheat prices by 26%.

"Anybody that uses corn is going to have some benefit as the price of their raw materials has declined significantly," said Gilbertie, whose exchange traded fund invests only in corn commodities products. Industries using corn feed as a food stock to raise animals "will have some significant and immediate benefits" since their highest cost is the price of corn.

That could mean everything from cereal makers to meatpackers.

Meatpackers, in particular, aren't squealing about the news. In a report on a big meatpacker that predates the USDA's announcement, Morningstar analyst Jeremy Cohen wrote that "the rapid increase in ethanol production caused grain prices to spike to levels well above normal, and with animal feed constituting 60% to 65% of the total cost of raising hogs and corn constituting roughly 85% of a pig's diet, elevated corn prices" weigh heavily on meat producers' profits.

From an investment perspective, the best bets are probably on the shares of companies that had already been raising their prices to customers in anticipation of what they thought would be much higher corn costs later this year.

Farm-products stocks as a group rose 5% in the week ending July 1, as tracked by Morningstar, turning around what had been, until then, a losing year. They are up 4.8% on the year as of last Friday. The S&P 500 Index was up 5.7% in the same week and is up 7.6% this year.

Corn prices may get another break if Congress decides that it will end its ethanol production tax subsidy program that takes millions of acres of corn production away from food products solely for the production of ethanol as a fuel additive. But, for now, it appears that's a whole 'nother can of corn.

Here are seven companies that should reap increasing profits this year directly as a result of the government's more optimistic prediction of a bumper crop in corn this year:

You can't talk about the corn industry without mentioning Archer-Daniels Midland ( ADM), the behemoth U.S. packaged-food processor and ethanol producer. The company operates in three segments: oilseeds processing, corn processing and agricultural services.

Morningstar analyst Ming Tang-Varner writes that the company "remains a middleman between farmers and large food companies. Profitability can swing widely with commodity prices, capacity utilization, and exchange rates."

And so, with corn prices on the decline, it would be among those firms most likely to see those savings drop to the bottom line.

Tang-Varner writes that "ADM's production in high fructose corn syrup, lysine (amino acids), citric acid, and corn-based ethanol among others, are the flagship products of the company. The global acceptance of high-fructose corn syrup as a main sweetener agent instead of sucrose (regular sugar) has generated high margins and extended growth for ADM.

"However, earnings from the corn processing segment have been volatile primarily thanks to dramatic price moves on corn ethanol in the past few years, and we expect the pattern to continue in the intermediate term," she wrote on May 9.

Standard & Poor's has the company rated "hold" due to "the company's exposure to volatile commodity industry conditions, and moderately aggressive financial policies and leverage levels given the inherent cyclicality of the company's agricultural operations."

But then the ratings firm gives it high marks on other aspects of its business. "We think ADM, as an internationally diversified agribusiness company, is well-positioned to outperform its peers based on scale and integration opportunities for the long term. While we think that global economic softness has slowed demand for ADM products, we think the company is well-positioned to benefit from long-term global population growth and economic expansion."

With a market valuation of just over $10 billion, ADM shares have gained a mere 3.5% this year, although they are up 5% in the week ending July 1.

Analysts tracked by S&P give ADM five "buys," three "buy/holds" and four "holds," and one "weak/hold."

The company is putting up strong numbers even in what has been a high-priced corn environment in the first quarter. ADM said two weeks ago that fiscal first-quarter earnings rose to 86 cents a share, from 65 cents, a year earlier. Sales jumped 33% to just over $20 billion.

The agricultural-market powerhouse ConAgra Foods ( CAG), which has a market value of $10 billion, said early this year that it expects input costs to rise up to 8% in fiscal 2012 in its main consumer business, after a 9% spike in its fiscal fourth-quarter, where earnings missed expectations due to the rapid cost increase.

So any dip in corn prices is sure to help results since corn is such a big part of its "input."

ConAgra is the maker of Healthy Choice meals, Slim Jim meat snacks and Reddi-wip dessert topping, which all contain high amounts of processed corn.

But it was doing just fine even before the revised corn outlook. For the quarter ended May 29, ConAgra reported a profit of 61 cents a share, up from 20 cents, a year earlier.

Its shares rose 2.8% in the week ending July 1, and are up 9.6% this year. The company has a market value of $10.5 billion.

A review of analysts' ratings by S&P found two "buys," three "buy/holds" and seven "holds."

---

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.

Tyson Foods ( TSN) is one of the world's biggest suppliers of beef, chicken and pork products and, as such, it's a huge user of corn and wheat products to fatten its critters for slaughter.

Standard & Poor's, which has it rated "hold," said the $6 billion-market-value company "is positioned to benefit from improving economic conditions, including rising incomes, and changing diets in developing international markets.

"We also expect Tyson's strategy to include a focus on expansion in value-added food products," and it has a hefty capital-expenditures budget of about $700 million, which it is putting to work to get more operational savings or improvements.

The ratings firm also said that "as a major diversified protein supplier, it is positioned to benefit from improving economic conditions, including rising incomes, and changing diets in developing international markets."

S&P said in a note written before the changed outlook on corn and wheat pricing that "we look for Tyson profits to be pressured by higher grain-feed costs. However, we anticipate that Tyson's chicken segment will benefit further from operating efficiencies.

Its shares are up 12.8% this year and 16.4% over the past 12 months.

Analysts' ratings are: five "buys," four "buy/holds," seven "holds" and one "weak/hold," according to S&P.

---

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."

The world's largest poultry producer, Pilgrim's Pride ( PPC) has seen its shares plunge 30% this year to a 52-week low in early June. It has a market value of about $1 billion and is about two-thirds owned by JBS SA, a Brazilian international meat company.

But lower and stable corn prices could prove a huge boon for the company as more people worldwide are choosing chicken as their main source of protein.

Its challenges extend beyond struggling with volatile corn prices. On June 21, the company's chief executive had to address concerns that it would violate its debt covenants with lenders, issues that have has weighed on its stock price.

He said the company doesn't expect any liquidity problems this year and if it did, its parent company could lend up to $100 million that would serve as a "backstop" for the company.

A Morningstar review of analyst ratings found two "buys," one "outperform" and three "holds" -- again, a company that is not receiving dire outlooks from analysts.

Its shares have gained 11.7% in the past month, bringing their decline for this year to 25%. Shares were recently trading at $5.

---

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.

>>To see these stocks in action, visit the 7 Stocks to Benefit From Lower Corn Prices portfolio on Stockpickr.