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Tyson Still Hard To Digest
Not all food stocks are equal. Companies like Kraft (NYSE:KFT) and Kellogg (NYSE:K) offer a certain level of stability because of their brand value and extensive product offerings, but meat producers like Tyson (NYSE:TSN) do not. With Tyson there are constant worries about oversupply, feed costs and export markets - issues that just by and large do not figure into the packaged goods companies. This June quarter is a good microcosm of that - although Tyson did deliver a solid result, worries about the next quarter are likely to keep a lid on the stock.
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The Quarter That Was
Tyson's revenue beat the average estimate by nearly $200 million, as it grew almost 12% to $7.4 billion. While the company's pork business was the growth leader (up 49% to $1.2 billion), the overall leader in terms of scale was once again the beef business, which grew more than 15% to $3.1 billion.
Profitability was quite a bit better this quarter, as gross profits jumped about 60% from the year-ago level. Tyson managed to maintain this leverage throughout the operating structure, leading to overall operating income growth of almost 84%. On a segment basis, the beef business was a standout - more than doubling to $176 million, while poultry operating profits climbed 30% to $186 million. (For more, see The Bottom Line On Margins.)
For a little bit of perspective, consider that Tyson did improve its overall operating margin to 6.8% (up from 4.1%) - a very respectable level for the industry, but a far cry from the "average" S&P 500 company.
The Road Ahead
For now, it looks like the export market is calm. The U.S. government reached a deal with the Russian government to resume chicken shipments, and this is a major market for Tyson and other poultry producers like Pilgrim's Pride (NYSE:PPC) and Sanderson Farms (Nasdaq:SAFM). Moreover, things seem quiet with other buyers like China.
That is not to say that there are not worries, though. The recent spike in wheat prices is not really a factor in protein production, but corn and soybean meal prices have been rising fairly sharply in recent weeks. As feed costs are overwhelmingly a large component of overall production costs, that could become a significant damper on profits in future periods - many protein producers do hedge, but persistently high prices would eventually outlast the hedges.
The Bottom Line
Since last quarter, the stock is down more than 10% while earnings estimates have been coming up nicely. Does that make the stock a buy today? In a word, no.
Long-term success in the market is often correlated with persistently strong profit margins, stable revenue growth, and high returns on invested capital and Tyson has historically offered exactly none of these things.
Take a look at Chinese protein producer Zhongpin (Nasdaq:HOGS) and South American agricultural company Cresud (Nasdaq:CRESY), both of which have outperformed Tyson's stock. I would not chase Zhongpin here, but I would still recommend investors cast their nets widely before settling for a name like Tyson.
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IN PICTURES: 20 Tools For Building Up Your Portfolio
The Quarter That Was
Tyson's revenue beat the average estimate by nearly $200 million, as it grew almost 12% to $7.4 billion. While the company's pork business was the growth leader (up 49% to $1.2 billion), the overall leader in terms of scale was once again the beef business, which grew more than 15% to $3.1 billion.
Profitability was quite a bit better this quarter, as gross profits jumped about 60% from the year-ago level. Tyson managed to maintain this leverage throughout the operating structure, leading to overall operating income growth of almost 84%. On a segment basis, the beef business was a standout - more than doubling to $176 million, while poultry operating profits climbed 30% to $186 million. (For more, see The Bottom Line On Margins.)
For a little bit of perspective, consider that Tyson did improve its overall operating margin to 6.8% (up from 4.1%) - a very respectable level for the industry, but a far cry from the "average" S&P 500 company.
For now, it looks like the export market is calm. The U.S. government reached a deal with the Russian government to resume chicken shipments, and this is a major market for Tyson and other poultry producers like Pilgrim's Pride (NYSE:PPC) and Sanderson Farms (Nasdaq:SAFM). Moreover, things seem quiet with other buyers like China.
That is not to say that there are not worries, though. The recent spike in wheat prices is not really a factor in protein production, but corn and soybean meal prices have been rising fairly sharply in recent weeks. As feed costs are overwhelmingly a large component of overall production costs, that could become a significant damper on profits in future periods - many protein producers do hedge, but persistently high prices would eventually outlast the hedges.
The Bottom Line
Since last quarter, the stock is down more than 10% while earnings estimates have been coming up nicely. Does that make the stock a buy today? In a word, no.
Long-term success in the market is often correlated with persistently strong profit margins, stable revenue growth, and high returns on invested capital and Tyson has historically offered exactly none of these things.
Take a look at Chinese protein producer Zhongpin (Nasdaq:HOGS) and South American agricultural company Cresud (Nasdaq:CRESY), both of which have outperformed Tyson's stock. I would not chase Zhongpin here, but I would still recommend investors cast their nets widely before settling for a name like Tyson.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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