One Clear Winner of the Processed Meat Shortage

You may have noticed a reduced selection of meat at your local supermarket.

What you do find is getting more expensive. Or perhaps the store is limiting the amount of beef you can buy.

That's not because there is a sudden shortage of cattle. Rather, meat processors have had to temporarily close some facilities due to the recent health crisis, and plants that have remained open are operating at lower capacity.

To help investors navigate the issue, here's a look at the different parts of the protein supply chain and the companies that might fare better than others while the shortage of processed meat continues.

[See: 6 Public Companies Navigating the Pandemic Like Pros]

It's worth remembering, however, that as long as many restaurants remain closed or serve at reduced capacity, many protein companies still face a hit to sales, even as they likely take some market share from beef.

While disruptions in the meat industry have brought positive and negative changes for different businesses, one clear winner may be emerging. Here's a sample of the protein supply chain affected by the pandemic:

-- Protein processing

-- Seafood

-- Food service

-- Restaurants

-- Grocery stores

-- Meat alternatives

Protein Processing

The bottleneck facing meat processing plants is creating less demand for cows, pushing prices down for ranchers. At the same time, the reduced supply of beef means higher prices at grocery stores.

Still, meat processor Tyson Foods (ticker: TSN) -- which has had to temporarily idle meatpacking facilities because of the pandemic -- isn't exactly a winner here.

Morningstar analyst Rebecca Scheuneman expects the issues for Tyson to be "kind of a wash." The company faces hundreds of millions of dollars in expenses from disruption at its plants, but that cost will be offset by the lowered buying prices and higher selling prices, she says.

Tyson has offered a temporary discount on some of its beef products and has paid a premium to cattle feeders amid the pandemic.

David Williams, president of Health Business Group, expects the bottleneck at beef packing facilities to last for some time because social distancing means they'll have to operate at reduced capacity. That will be the norm until there is an effective treatment or vaccine, he says, and the reduced capacity could last for two years.

While processors can switch to less labor-intensive cuts of meat to simplify the process and increase their operating hours, demand for beef will drop along with people's income because of the health crisis' impact on the wider economy, he says.

Tyson also processes poultry, sales of which could benefit if supermarket customers can't find or afford beef.

But processing plants that are more focused on poultry, including companies like Pilgrim's Pride ( PPC) and Sanderson Farms ( SAFM), could benefit more. Scheuneman says this industry isn't experiencing as much disruption because it uses smaller plants with fewer employees, leaving less of a chance for infection. She notes that it's also less complicated to process chickens, which can be sold whole.

For Tyson, all of its business segments, including chicken, are seeing a decline in demand from the food service industry -- which serves restaurants, hotels and schools -- and an increase in sales at grocery stores. But retail sales haven't been enough to offset the losses in food service.

Seafood

Seafood companies face a similar landscape.

For salmon farmer Mowi (MHGVY), increased retail sales only partially offset reduced demand from the food service industry. Similarly, frozen seafood processor and marketer High Liner Foods (HLNFF) has seen an unprecedented surge in retail demand, but it has also experienced a significant decline in its food service business, which accounted for about 65% of its total business last year.

Thai Union Group (TUFBY), owner of Chicken of the Sea tuna brand and part owner of the Red Lobster seafood restaurant chain, said earlier this month that it has seen an increase in demand for canned fish products, but its frozen and chilled seafood products -- which are typically sold to restaurants, hotels and catering businesses that prepare them for final consumption -- have taken a hit in the U.S.

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As for sales in grocery stores, the processed meat shortage is an opportunity for seafood companies.

"Lack of availability of meat and higher prices can play a role in increased seafood demand," says Rabobank analyst Gorjan Nikolik.

Food Service

For food service companies, less meat to sell is just a drop in the bucket of their problems.

Food service distributors US Foods Holding ( USFD) and Sysco ( SYY) have taken a big hit from lowered demand.

All things considered, Scheuneman thinks they've been managing the hand they've been dealt well. This includes pivoting to sell some of their products in grocery stores that would otherwise have gone to other outlets.

That said, shares of USFD and SYY have dropped by 40% and 60%, respectively, since the start of the year.

Restaurants

Scheuneman sees restaurants as net losers in the equation as some of them are paying higher prices for beef and pork but not passing that cost along to customers.

Fast-food restaurants will struggle to increase prices, as people with diminished incomes will be looking for value, Williams says. But some customers who have been frequenting more expensive fast-casual restaurants, such as Panera, may begin to go to lower-end fast-food chains where they don't have to enter the restaurant, potentially giving companies like McDonald's Corp. ( MCD) a bigger customer base.

Wendy's ( WEN) has been particularly affected because of its reliance on fresh beef compared with other chains that use frozen patties, Williams says.

Wendy's CEO Todd Penegor said on a recent conference call that the bottleneck at beef suppliers has led to a short supply in some of its menu items at some restaurants. But the chain has still been able to deliver fresh hamburgers to all of its restaurants, he said. Meanwhile, Wendy's has shifted its short-term marketing to focus on chicken products.

Ricardo Ernst, director of Georgetown University's Global Business Initiative, thinks that fast-food chains might end up raising prices on individual burgers, though a more likely tactic would be to first stop discounting burgers and have more specials on chicken.

Shares of MCD and WEN have fallen by roughly 9% year to date.

Grocery Stores

Supermarkets are rationing meat because they want to be perceived as offering good service to all their customers, not just the ones who can get there first, Ernst says.

Overall, Ernst thinks the processed-meat shortage won't hurt grocery stores like Kroger ( KR) and Costco Wholesale ( COST) because they sell such a wide variety of items.

Still, meat is a big sales category for supermarkets, notes Scheuneman. While that means it is an issue for grocery stores, this comes against the backdrop of a windfall of demand as more people spend money at grocery stores and less eating out, she says.

At supermarkets, she expects there will be less demand for beef as prices rise, with customers also trading down for less expensive products, such as burgers instead of steaks.

KR is up around 10% since the start of the year, while COST is up around 5%.

Meat Alternatives

If there is a clear winner it would be the alternate protein producers, such as Beyond Meat ( BYND), says Keith Daniels, partner at Carl Marks Advisors. They offer a good substitute for the taste of beef and now have an opportunity with customers who are craving that taste.

Scheuneman says that the issue is a great opportunity for Beyond Meat, which plans to lower prices this summer to try to take some market share from higher-priced meat products during the prime outdoor grilling season.

[See: 7 Alternative Investments That Might Fit Your Portfolio.]

"One of the ways we can be a solution is to offer lower pricing," Ethan Brown, Beyond Meat's CEO said on an earnings conference call earlier this month. "You'll see us do more discounting this summer than normal just because of the opportunity to be relevant to the consumer as animal protein prices are spiking and supply is in short order."

BYND has risen by 80% year to date, and saw a remarkable 152% spike following the stock market's sell-off in March.

Matt Whittaker began writing for U.S. News & World Report in 2015, covering investing topics. Based in Colorado, he also specializes in natural resources and outdoor industry journalism. Mr. Whittaker has reported on renewable energy, coal, oil, natural gas, metals and seafood companies from the Americas, Europe and Asia, and his work has appeared in The Wall Street Journal, Barron's, Pacific Standard, VICE Sports, Backpacker online and High Country News. He has been a fellow with the Knight Center for Specialized Journalism and is particularly proud of an Overseas Press Club Foundation scholarship he won for a series of articles on landmines in Bosnia and Herzegovina. Born in Knoxville, Tenn., Mr. Whittaker graduated with a degree in journalism from the University of Tennessee. You can follow him on Twitter and connect with him on LinkedIn.