There's a swine fever spreading in China that Wall Street fears could hit Deere and these stocks
- Stocks that are most prone to swine fever fears include Bloomin' Brands, Phibro, Darling Ingredients, Deere, and Hormel, according to Wall Street analysts.
- "Beyond tariffs, Chinese import demand for soybeans is likely to decline significantly as it deals with a ~30% reduction in its hog herd following the outbreak of African swine fever," J.P. Morgan analysts said of Deere.
A trade fight with the U.S. isn't the only war China is fighting. African swine fever has decimated the pig population in China and sent pork prices soaring. As many as up to 200 million Chinese pigs have reportedly been lost due to the disease.
Now, Wall Street analysts are scrambling to assess the fallout from the fast spreading illness and how to invest around it.
J.P. Morgan has downgraded Deere to underweight on concerns about the "rapidly deteriorating fundamentals in U.S. agriculture." This is due not only to the trade war, but also the decline in soybean demand in China as a result of the reduction in the hog herd due to the outbreak of the African swine fever.
And last week, restaurant hospitality group Bloomin' Brands was downgraded by analysts at BMO.
"We believe the potential magnitude and duration of African swine fever impacts to margins is underappreciated and BLMN is among the restaurants most at risk," analyst Andrew Strelzik said. "Our 2020 estimates are below consensus even though we are taking a conservative approach to layering African swine fever impacts into our model and protein pressures likely will persist beyond 2020."
Shares fell 10% on the week.
Hormel Foods reported earnings on Thursday and though the company beat, they warned that sales could be hit on fever worries.
That could also be a continued hinderance on the stock, according to analysts at Stephens.
"While the result in the quarter was slightly ahead of expectations, guidance was softer than street estimates, and management's mention of ASF uncertainty could pressure the stock," analyst Ben Bienvenu said.
Animal food manufacturers like Darling Ingredients and Phibro are also feeling the swine fever heat.
"Recent analysis has estimated that up to 30% of Chinese swine production could be lost to ASF, and Phibro's management fears that this estimate could be low," analysts at Gabelli said.
"The number of confirmed ASF cases continue to climb and has the potential to have a greater impact on Darling's business," Goldman Sachs analysts said. "Management and the industry remain cautious as containing further outbreak of ASF is a top priority."
Phibro is up over 5% on the week while shares of Darling are down 3.76%.
Here are stocks that analysts worry analysts over the swine fever:
J.P. Morgan- Deere, Underweight rating
"We are downgrading DE to Underweight as a result of the rapidly deteriorating fundamentals in US agriculture. .. .Beyond tariffs (which have weighed on US soybean exports in 2018/19 TD, down 27% YoY), Chinese import demand for soybeans is likely to decline significantly as it deals with a ~30% reduction in its hog herd following the outbreak of African swine fever (ASF). Brazil and Argentina combined have produced close to record soybean and corn crops this season, while US dollar strength remains a headwind for US competitiveness on the global market."
Goldman Sachs- Darling Ingredients, Neutral rating
"The number of confirmed ASF cases continue to climb and has the potential to have a greater impact on DAR's business. In 3Q18, DAR experienced a $7.2mn writedown on their Chinese blood plasma inventory in its Feed business, and mentioned 4Q18 supplies of porcine blood plasma were 15-20% lower versus prior year levels. China lifted the ban on feeding blood plasma after studies confirmed that once heat is applied and is dried, the plasma is no longer harmful. Management and the industry remain cautious as containing further outbreak of ASF is a top priority. Within the Food business, the lower hog supply will negatively impact the availability of pig skin necessary for the gelatin business which mostly sell into the pharmaceuticals industry. DAR mentioned seeing higher costs in Europe, however the company has enough supply to manage 2Q, with pricing potentially pressured in 3Q, in its view."
Gabelli- Phibro Animal Health, Buy rating
"African Swine Flu impact coming. Sales in Asia Pacific ($24.4M, +56%) were strong in Q3, but the impact from the
outbreak of AFS in China is coming. Recent analysis has estimated that up to 30% of Chinese swine production (up to 200 million pigs) could be lost to ASF, and Phibro's management fears that this estimate could be low. The company is resetting expectations for Q4 and the full year with animal health expected to be flat-to-down (vs. 1.5% growth through first nine months)."
Stephens- Hormel, Equal-weight rating
"While the result in the quarter was slightly ahead of expectations, guidance was softer than street estimates (albeit consensus is a bit messy with some analysts accounting for the sale of Cytosport in numbers, while others did not), and management's mention of ASF uncertainty could pressure the stock [May 23]. We have an EW rating and our estimates/PT are under review."
BMO- Bloomin' Brands, Underperform rating
"We are downgrading BLMN to Underperform and lowering our target price to $18 (6.5x 2019E EBITDA) in conjunction with our industry note on the implications of African Swine Fever (ASF). We believe the potential magnitude and duration of ASF impacts to margins is underappreciated and BLMN is among the Restaurants most at risk. Our 2020 estimates are below consensus even though we are taking a conservative approach to layering ASF impacts into our model (raised 2020 food inflation by only 100 bps) and protein pressures likely will persist beyond 2020."
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Correction: An earlier version misstated the name of the disease. It is African swine fever.