010233 Food, Agri-Biz Stocks Hit by Mad Cow

Chicago - Europe's mad cow disease scare has yet to spook the U.S. investment herd away from food and agribusiness stocks, but if American consumers turn their backs on beef, there could be a stampede.

For worldwide hamburger giant McDonald's Corp., the disease has already hurt sales in one of its largest markets. But Archer Daniels Midland Co., a large producer of grain-based feed, has seen a short- term boost in its stock price on increased demand for feeds that are not beef-based.

“I think this is an evolving process,” said Merrill Lynch food analyst Leonard Teitelbaum. “I don't know if it's (mad cow disease scare) stopped growing and is in decline or if it's only on its first leg.”

The brain-wasting disorder, known as Bovine Spongiform Encephalopathy, has been found in European cattle and eating tainted beef is believed to have caused the deaths of more than 90 people there.

BSE has never been found in the U.S. and since 1997 the government has banned the feeding of ruminant animal parts back to cattle because this practice is believed to have helped transmit the disease in Europe.

But analysts say no matter how good a company is at quality control, the uncertainty over the future of the disease must be factored into stock prices.

And for a host of U.S. companies largely dependent on consumer confidence in the domestic beef supply, the verdict depends largely on events beyond their immediate control.

The biggest problem companies now face is the emotional reaction of consumers to media reports of the disease. Because individual cases of the disease often take a long time to show up, the risk for companies dependent on beef products cannot be fully measured, analysts said.

“The risk is that this fear is continuing,” said Prudential Securities food analyst Jeffrey Kanter. “I see 30 reports on this thing a day. If it really starts to gain momentum in the (U.S.) public eye, you could see some adverse behavior on beef.”

Investors are already skittish. McDonald's shares fell sharply following a recent earnings report that revealed European sales had suffered in the fourth quarter due to consumers' aversion toward hamburgers. The company uses muscle meat, believed to be safe, to make its products.

“There's a gap between reality and perception,” said Salomon Smith Barney analyst Mark Kalinowski. Salomon believes concern among U.S. investors has heightened enough to warrant a special Tuesday conference call on the issue. The firm has named a host of U.S.-based restaurants, including Wendy's International Inc., Darden Restaurants Inc. and Taco Bell parent Tricon Global Restaurants Inc. as stocks to watch.

Along with McDonald's, analysts believe that No. 2 U.S. hamburger maker Burger King Co., a unit of U.K.-based food conglomerate Diageo Plc, has suffered. The chain, which is readying for an initial stock offering, might see investors' appetite wane, should the public sentiment carry across the Atlantic, analysts said.

Sara Lee Corp., a large multinational which sells processed meat in Europe, had said it saw some adverse affect on its European sales. But public confidence in the U.S. beef supply has sustained the stocks of large meat packers such as IBP Inc. and ConAgra Foods Inc.

“So far, I don't think it's had an impact on our stocks,” said Prudential's Kanter. In a recent report, however, he stressed that “should the U.S. consumer begin to lose their appetite for beef, companies like ConAgra, IBP and Cargill could be in for some difficult times.” Cargill is one of the world's largest privately-held companies.

Advocates of the U.S. beef industry, including the National Cattlemen's Beef Association, have begun vigilant public awareness efforts to show that the government and the industry have developed a range of safeguards to ensure the disease never crosses U.S. borders. Last week, the U.S. joined Canada and Mexico in banning imports of Brazilian beef as a precaution, though no mad cow has been reported there.

But the American public is so dependent on beef that even moderate sales downturn of one or two percent could be devastating to markets, analysts said. Last year, on average, Americans ate about 66.2 pounds of beef per person.

“I think it could really have a major impact,” said Robert Goldin, a consultant with Technomic Inc., a market research firm focused on food industry trends. “I wouldn't be to quick to dismiss it having an impact in the U.S.”

What is bad news for some U.S. companies could be a windfall for others. Feed makers ADM and Corn Products International Inc. have seen demand for their grain-based feed exports to Europe rise, following Europe's December switch to non-animal based feeds.

Midwest Research food analyst Christine McCracken said that chicken producer Tyson Foods Inc. and pork producer Smithfield Foods Inc. could also get a boost if demand for non-beef exports to markets typically served by Europe rises as European consumers eat more locally-produced chicken and pork.

A host of other companies, such as those who create the tests for mad cow disease, and companies that use rendered animal products, such as paint makers and other industrial companies, might gain, should a glut of rendered meat-and-bone-meal hit the market and drive prices lower. For now, though, it's largely a wait-and-see game, analysts said.

“If this issue continues to play out for a long time, I think it could be detrimental to many more companies,” said Edward Jones analyst Patrick Schumann.

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