Previously, we’ve chronicled some of the winners and losers from the recent trade war that has seen multiple rounds of tariffs enacted on imports to the U.S. and retaliatory tariffs imposed by other nations on U.S. exports.
Steel companies U.S. Steel (X - Free Report) and Nucor (NUE - Free Report) have successfully navigated the tariff structure in a way that has allowed them to raise prices and increase earnings, while Harley Davidson (HOG - Free Report) has estimated that EU tariffs will cost the motorcycle manufacturer $100M/year and is planning to move production for the European market offshore to avoid the tariffs.
The latest victims of the trade war seem to be food producers who have seen prices fall on trade uncertainty and costs rise - especially the prices of steel and aluminum packaging - as well as arecent uptick in feed prices.
Hormel Foods (HRL - Free Report) , the maker of SPAM as well as Skippy peanut butter and Jennie-O Turkey, reported Q2 results Thursday that were basically in-line, beating the Zacks Consensus Estimate for earnings by a penny and exactly matching the sales estimate of $2.4B. The company guided lower however on sales for full-year 2018, from a range of $9.70 - $10.10/share to $9.40 - $9.60. Earnings guidance was unchanged at $1.81 - $1.95/share. Analysts are slightly less optimistic, with the Zacks Consensus Estimate currently at $1.77/share after 3 recent downgrades. It had been $1.83/share 90 days ago. HRL is a Zacks Rank #4 (Sell).
In the investor presentation, the company noted “Fresh pork export volume, sales and profitability declined sharply in the quarter due to the impact of increased tariffs in key markets.” Better than expected results in other business units made up for the shortfall and explain the on-target earnings figure, but the specter of tariffs continues to weigh on expectations at Hormel
Sanderson Farms (SAFM - Free Report) , reported disappointing results on Thursday, earning just $0.50/share versus estimates of $1.08/share. Earnings would have been $0.58/share except for an $0.08/share accrual for contributions to an employee compensation plan. It was a huge miss - especially since the Zacks Consensus Estimate had already been cut by more than 60% in the past 90 days from $3.21/share. In Q2 2017, the company earned $5.21/share. SAFM is a Zacks rank #5 (Strong Sell).
Sanderson cited low domestic prices for its chicken products and increased feed costs and corn and soybeans rebounded off multi-year lows during the quarter. Though the company did not specifically cite tariffs as the cause, it’s likely that increased supply of domestic meat that would ordinarily have been exported was a contributing factor.
Late in July, Tyson Foods (TSN - Free Report) warned that full year earnings would likely be $5.70 - $6.00/share, down from previous guidance of $6.55 - $6.70/share. In the announcement, CEO Tom Hayes explained, “The combination of changing global trade policies here and abroad, and the uncertainty of any resolution have created a challenging market environment of increased volatility, lower prices and an oversupply of protein.” The Zacks Consensus Estimate subsequently fell from $6.57/share to $6.03/share.
Tyson is a Zacks Rank #4 (Sell).
When Tyson reported Q2 earnings on August 6th, net earnings were $1.50/share, beating lowered estimates by $0.17/share, but 7% behind the second quarter of 2017.
Finally, Pilgrim’s Pride (PPC - Free Report) , producer of a wide range of poultry products, basically met the Zacks Consensus Estimate of $0.54/share with net earnings of $0.53/share, though that estimate had been slashed in the prior 30 days and earnings were 44% lower than the $0.93 the company earned in Q2 2017.
It’s basically the same story as the other poultry stocks, low prices due mostly to a glut of domestic meat products are eating into earnings.
Full year estimates have been reduced from $3.04/share 60 days ago to just $2.08/share today. Pilgrim’s Pride is a Zacks Rank #5 (Strong Sell).
Food companies routinely face challenges in the form of highly variable input prices and sales prices, as well as weather issues and seasonal changes in consumer demand. In general, they have become adept at managing the factors they cannot control with grain price hedging and creative outputs that maximize profits. In the case of tariffs, however, they’re on the wrong side of the prevailing trend in both input cost and end prices and it could be rough sailing until the trade situation is worked out.
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