Generally speaking, investors should look to own agricultural stocks when things are about as bad as they can get and can only go up. When it comes to Tyson Foods (NYSE:TSN) there are indeed some areas that are performing relatively poorly, but the question remains whether today's valuation really represents a low-risk/high-reward set up.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Trading Costs for Price
Tyson posted some frankly blistering price increases for the fiscal first quarter. Reported revenue rose more than 9%, as the company traded a nearly 15% overall price increase with a 5% volume reduction.

Pork was the leader, as nearly a 3% volume growth and a 16% price appreciation fueled a 19% gain in revenue. Beef revenue rose 9% as a 19% price appreciation offset nearly a 9% volume erosion, while chicken revenue rose about 6% as an 11% price growth overbalanced 5% volume declines. Prepared foods grew nearly 7% on a 1% volume decline and an 8% price increase. (For related reading, see 22 Ways To Fight Rising Food Prices.)

Advertisement - Article continues below.

Tyson can see these hefty price increases because overall production costs in the industry are so much higher. Due in large part to feed costs, Tyson saw gross margins fall about four points this quarter. Operating income fell 44%, with the company's operating margin dropping by half.

Scale Pays off, but only to a Point
Tyson fares relatively better than many other protein producers because of its scale. It can garner premiums for services that other companies can't provide (or provide economically) like custom cutting, while spreading costs over a bigger base.

Still, there is a limit to this as other producers are quite large as well. In beef, for instance, the two top companies (Tyson and Cargill) are nearly 45% of the market. Likewise, in pork, the two biggest companies ((Smithfield (NYSE:SFD) and Tyson)) are about 45% of the market. What this means, then, is that there is less for Tyson to gain from incremental industry breakeven pricing.

Prepared Slow to Develop
Tyson is doing OK in the prepared food space, and according to Nielsen's data, holds about a 7% share in the frozen entree space. Nestle (OTC:NSRGY) holds over one-quarter of this market, with ConAgra (NYSE:CAG) holding a 17% share and Heinz (NYSE:HNZ) holding about a 6% share. This doesn't include other market categories like shelf-stable packaged meals or refrigerated mills, where Hormel (NYSE:HRL) is stronger.

Will Hoping for Better Work out?
One of the things that concern me about Tyson as a stock today is the amount of optimism that a lot of analysts and investors seem to have about 2012. Industry-wide pork margins are about as strong as they get (though they declined for Tyson from 14.3 to 11.2% this quarter), and expectations for big improvements in beef and chicken seem ambitious. Grain prices should be as bad as they have been, but animal supplies seem a little high and maintaining pricing could prove to be tricky.


The Bottom Line
As I've said more than once, Tyson is a very interesting stock to own close to one times book value. At today's price, though, the stock looks pretty much fully valued both on the basis of metrics like price-to-book and discounted cash flow analysis. Absent a big pullback, there are better investment prospects in food and agriculture today. (For related reading on book value, see The 4 Basic Elements Of Stock Value.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.