Something Good's Cooking at Tyson (TSN) - Barron's
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Price: $57.25 -2.39%
Overall Analyst Rating:
SELL (= Flat)
Dividend Yield: 3.6%
EPS Growth %: +15.4%
Overall Analyst Rating:
SELL (= Flat)
Dividend Yield: 3.6%
EPS Growth %: +15.4%
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Tyson Foods (NYSE: TSN) has been shunned by investors fearful of higher feed prices for chicken cutting into margins at the company best known for its poultry. But Barron's says this is the wrong approach, and there's more value in Tyson than initially presents itself.
Though the stock is down about 14 percent over the last several months, Barron's contends the dip is a buying opportunity for long-term investors. Yes, the chicken business is being hampered by high feed prices, soft pricing, lack of demand, and overproduction.
But Tyson is strong in the beef and pork production segment, leading the company to report near-record earnings for fiscal 2011. Tyson is the number one processor of beef and chicken in the U.S. with a 22 percent market share in each category. For pork, Tyson is second with a 17 percent market share. Beef accounts for about 41 percent of revs, with chicken at about 33 percent, and pork just 13 percent. Barron's notes the remaining revenue is from Tyson's prepared-foods division.
Last quarter, Tyson showed an 8.8 percent return on sales and operating income in the Pork segment. Beef had a 4 percent return on sales with operating income of $140 million. U.S. pork and beef exports increased 13 percent and 15 percent, respectively, in May when compared with the same period last year.
Comparably, Tyson's chicken operations had a 1 percent return on sales and operating income of $28 million, to which COO John Lochner said he was proud to keep the segment profitable in a challenging economic environment.
Tyson is also diversifying away from foods -- though certainly not getting out by any means -- with the establishment of a biofuels joint venture with Syntroleum named Dynamic Fuels. Tyson takes fats and grease from its processing, and converts them into an energy source. KLM Royal Dutch was the first to use Dynamics "biokerosene" on a commercial fight. (Side note: still no word on whether sales have gone up on the delicious smell of beef and pork hovering in the air following the flights.)
One concern for investors might circle around egg production. There's no chicken-and-egg riddle here; without sustained levels of egg production, Tyson will have less product to work with down the line. Barron's reports egg production has been declining for 17 straight weeks, which is finally leading to lower production levels. Chicken production was up 5 percent in June, flat in July, and down 3 percent in August. The decline has helped to push chicken prices up 12 percent over the last five weeks.
Lack of production does have an upside: less use of corn. With Latin America planting fields in order to meet previous demand, the lack of chickens will lead to a lack of corn demand, meaning stockpiles will surely increase. The abundance of inventory will surly push corn prices down from current levels of about $7 per bushel to a $4 to $5 price range, according to one analyst. Feed prices might also see a 20 percent to 30 percent drop toward the back half of 2012, while chicken prices could climb an additional 50 percent over the same period. With gross margins at near 10-year lows in the mid-20 percent range, this will be a welcome event for investors.
Last year, Tyson made some strong moves in cutting costs. For its chicken unit alone, Barron's notes, Tyson sliced about $600 million of costs, and is on track to trim that number down by an additional $200 million.
Current estimates have Tyson earnings $1.95 per share for its fiscal 2011 on revenue of $32 billion. Those numbers will increase slightly, earnings moving about 1.5 percent higher and revenue just over 6 percent, to $1.98 per share and $34 billion, respectively.
Tyson has $1 billion in cash and $1.5 billion of debt on its balance sheet, and plans to repurchase 22.5 million shares.
Shares of Tyson are 1.8 percent lower on the session, trading mostly inline with the broader stock market.
Though the stock is down about 14 percent over the last several months, Barron's contends the dip is a buying opportunity for long-term investors. Yes, the chicken business is being hampered by high feed prices, soft pricing, lack of demand, and overproduction.
But Tyson is strong in the beef and pork production segment, leading the company to report near-record earnings for fiscal 2011. Tyson is the number one processor of beef and chicken in the U.S. with a 22 percent market share in each category. For pork, Tyson is second with a 17 percent market share. Beef accounts for about 41 percent of revs, with chicken at about 33 percent, and pork just 13 percent. Barron's notes the remaining revenue is from Tyson's prepared-foods division.
Last quarter, Tyson showed an 8.8 percent return on sales and operating income in the Pork segment. Beef had a 4 percent return on sales with operating income of $140 million. U.S. pork and beef exports increased 13 percent and 15 percent, respectively, in May when compared with the same period last year.
Comparably, Tyson's chicken operations had a 1 percent return on sales and operating income of $28 million, to which COO John Lochner said he was proud to keep the segment profitable in a challenging economic environment.
Tyson is also diversifying away from foods -- though certainly not getting out by any means -- with the establishment of a biofuels joint venture with Syntroleum named Dynamic Fuels. Tyson takes fats and grease from its processing, and converts them into an energy source. KLM Royal Dutch was the first to use Dynamics "biokerosene" on a commercial fight. (Side note: still no word on whether sales have gone up on the delicious smell of beef and pork hovering in the air following the flights.)
One concern for investors might circle around egg production. There's no chicken-and-egg riddle here; without sustained levels of egg production, Tyson will have less product to work with down the line. Barron's reports egg production has been declining for 17 straight weeks, which is finally leading to lower production levels. Chicken production was up 5 percent in June, flat in July, and down 3 percent in August. The decline has helped to push chicken prices up 12 percent over the last five weeks.
Lack of production does have an upside: less use of corn. With Latin America planting fields in order to meet previous demand, the lack of chickens will lead to a lack of corn demand, meaning stockpiles will surely increase. The abundance of inventory will surly push corn prices down from current levels of about $7 per bushel to a $4 to $5 price range, according to one analyst. Feed prices might also see a 20 percent to 30 percent drop toward the back half of 2012, while chicken prices could climb an additional 50 percent over the same period. With gross margins at near 10-year lows in the mid-20 percent range, this will be a welcome event for investors.
Last year, Tyson made some strong moves in cutting costs. For its chicken unit alone, Barron's notes, Tyson sliced about $600 million of costs, and is on track to trim that number down by an additional $200 million.
Current estimates have Tyson earnings $1.95 per share for its fiscal 2011 on revenue of $32 billion. Those numbers will increase slightly, earnings moving about 1.5 percent higher and revenue just over 6 percent, to $1.98 per share and $34 billion, respectively.
Tyson has $1 billion in cash and $1.5 billion of debt on its balance sheet, and plans to repurchase 22.5 million shares.
Shares of Tyson are 1.8 percent lower on the session, trading mostly inline with the broader stock market.
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