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Should You Beef Up Your Exposure to Meat Processors?

Their shares have gotten hammered this year. Are they opportunities or value traps?

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Even before anyone heard of the coronavirus, the meat industry was a tumultuous space, plagued with high-profile antitrust lawsuits, tariff wars, environmental backlash, and threats of obsolescence from the frenzied demand for plant-based alternative proteins.

Then the pandemic hit, which instantaneously shifted nearly half of meat demand from the food-service channel to retail, causing significant supply chain disruptions. Furthermore, production disruptions caused product shortages and significant meat inflation, while the virus resulted in rampant illnesses and even deaths among plant workers.

With many of the stocks down significantly year-to-date, are these names buying opportunities or value traps?

To answer this question, Morningstar has taken a close look at global meat demand and has determined that even as developed markets are limiting meat consumption, strong emerging-markets demand should drive 2.5% annual growth over the next decade.

However, increasing capacity to meet this demand would likely result in substantial environmental damage. There would be a material increase in greenhouse gas emissions, significant amounts of forest would be destroyed, and the industry would increase its already high use of water, potentially jeopardizing our freshwater supply. Clearly, sustainable alternatives, such as plant-based proteins and lab-grown meat, will play a role in feeding the world.

While ESG issues represent real liabilities for meat producers, we think they will prove manageable. In particular, we see value in shares of Pilgrim's Pride (PPC) and Tyson (TSN).

Morningstar equity analyst Rebecca Scheuneman and Sustainalytics senior associate Jessica Grant provided the research behind this segment.