Shares of Tyson Foods rose 4.59% on Monday (Oct. 28) as analysts expect chicken processors will benefit on news that China could soon lift a ban on U.S. poultry that has been in effect since 2015. Reuters reported over the weekend the deal is contingent on the signing of a Phase 1 trade agreement, which the U.S. and China expect to sign next month.
Ben Bienvenue, an analyst with Stephens Inc., said the firm continues to monitor news flow on the situation.
“In the event that a ‘Phase 1’ agreement removes this long-standing trade barrier this could be a significant positive for the U.S. chicken industry given China’s historical prominence as a chicken import partner, and because of the country’s current need for additional protein imports in the wake of ASF-driven supply challenges in China,” Bienvenue noted Monday.
He said China is the world’s largest market for chicken paws and feet, which garner much higher prices for processors when exported to Asian countries with a high demand for the products which have little demand in western markets.
“Chicken feet are less popular in Western civilization and due to a lack of demand, the product is typically sold to rendering plants at significantly lower prices. In China, chicken feet can be sold for as much as $1 per pound, whereas feet sold into rendering plants typically fetch ~$0.10-$0.20,” Bienvenue explained.
He said the announcement is a “clear positive” for Tyson Foods, Pilgrim’s Pride and Sanderson Farms, through Sanderson is likely to benefit the most, given prior sales trends before the ban was levied. (Stephens conducts investment banking services with all three companies and is compensated accordingly.)
Bienvenue remains bullish on Tyson Foods with a target price of $95 per share. Shares of Tyson Foods (NYSE: TSN) closed Monday at $82.08, up $3.60, or 4.59%. Over the past 52 weeks, Tyson Foods shares have traded between $49.77 and $94.07.
Tyson Foods will report its fiscal 2019 earnings on Nov. 12, ahead of the market opening. Wall Street consensus is $1.29 per share. down from $1.58 per share in the year-ago period. Revenue is expected to top $11.02 billion, up 10% year-over-year.
“While any agreement still needs to be finalized, we view this as a clear positive for the U.S. poultry industry … as a lift of the import ban would provide a significant export market for U.S. producers and could provide support to U.S. chicken prices,” analyst Peter Galbo, with Bank of America Merrill Lynch, wrote in a note to clients.
He said the lifting of the ban is one of four scenarios in which poultry producers could benefit from African Swine Fever (ASF) occurring in China, which led to the culling of millions of hogs, which caused some consumers to switch consumption to chicken from pork. Tyson Foods CEO Noel White has said the outbreak of ASF throughout China and the loss of that protein would mean more demand for U.S. protein sources of all kinds in the next year and beyond. He said Tyson is ready to meet that demand.
Tyson Foods competitor Pilgrim’s Pride (NYSE: PPC) closed at $30, up $2.30, or 8.3%. Sanderson Farms was the biggest winner on the news with shares (NASDAQ: SAFM) rising 15.76% to close at $155.71.