US FOCUS LIST UPDATE – POULTRY PROCESSORS HIT BY AVIAN FLU OUTBREAK
The news that a highly contagious strain of bird flu has infected turkey farms in Arkansas and Missouri sent TSN and SAFM shares into freefall overnight – SAFM down –4.2 % and TSN down –5.6%. Clearly this news is a concern – both in terms of the direct cost to the US turkey producers associated with containing the outbreak as well as immediate lost sales and the prospect that it could lead to the imposition of even wider export restrictions on poultry products from the US (the US exports around 14% of turkey and 18% of chicken and at present 30 countries – including China – restrict US poultry product exports).
QMG data has been very positive on US poultry producers (US15.12) since early 2014. The two key reasons highlighting our positive view on the sector were the significant revenue growth (lead by very strong pricing) and margin expansion (driven by substantial cost reduction). Poultry is a core part of the US diet, and our concern is that this news comes after other outbreaks in other states were announced earlier in the year, which implies that this disease is spreading fast and the insight that our data provides is no longer immediately relevant to investors. As such, we are removing both TSN and SAFM from our US focus list.