Tyson Foods: Not the Time to Be Chicken

| About: Tyson Foods (TSN)

Tyson Foods (NYSE:TSN) delivered mixed 4th quarter results (see conference call transcript). The company reported a 50% rise in earnings from 10 cents to 15 cents, but was 3 cents shy of expectations. On the plus side, it was able to beat revenue estimates by an impressive $200 million, as sales increased 8% from $6.66 billion to $7.2 billion. TSN’s diversification efforts salvaged its quarter, as its $91 million loss, due to its chicken segment, was positively offset by profits of $234 million in its beef and pork operations. TSN’s prepared food segment had a $5 million loss for the quarter, although it still managed to contribute $63 million of earnings for the entire year.

Guidance lowered: Management issued a fuzzy forecast. It projected fiscal 2009 revenues of $28 -$29 billion or as much as 8% higher than 2008 revenues of $26.8 billion, but still offered the possibility of a first quarter loss. Management stressed they have no plans to cut chicken production due to the following:

  1. Their Quick Service restaurant customers have expressed supply concerns ( the fast food market is still very good, as consumers scale down from mid level eateries to lower tier);
  2. Export market will rebound;
  3. Retail sales have picked up.

The conference call revealed that, in general, analysts were disappointed that TSN was not willing to cut production, but I view this as a favorable development since it reinforces the reality of TSN’s ability to attract adequate demand through its multitude of customers. Secondly, capacity reductions from both Pilgrim's Pride (NYSE:PPC) and Sanderson Farms (NASDAQ:SAFM) could be sufficient enough to begin improving selling prices.

International expansion plans: The company expects to invest another $95 million in its Brazil operations and $115 million in its Chinese joint venture. TSN’s CEO, Richard Bond, was passionate about these investments: “In past tough times, we pulled back from plans to expand, not this time”.

Grain cost escalation: Grain costs for the quarter were up $230 million and $600 million on the year. To illustrate the importance of feed grain prices to TSN’s bottom line, the company would have delivered earnings of 65 cents, or four times what they actually reported, if grain prices had stayed flat. Rich Nelson, Director of Research for Allendale Commodities, sees feed costs improving with the worst behind them now. Nelson added, “poultry producers should be profitable by December or January based on poultry production cuts yielding higher prices as feed prices decline”.

Analyst downgrade: It’s sometimes amusing when analysts speak their mind. DA Davidson’s Tim Ramey was no exception. He downgraded the shares from a buy rating to neutral stance, while slashing his price target 65% from $22 to $7.50. He was somewhat annoyed that TSN planned no poultry production cuts. His statement was comical, Ramey exclaimed,

Because Tyson felt they were the ones who cut production in previous quarters, now it was time for others to feel the pain.

What good does it do for investors, downgrading their shares after the damage has already been inflicted? Lowering your opinion on the shares after they have already lost two thirds of their value is idiotic. If Ramey downgraded the shares when they were in their mid teens, I certainly would have been able to appreciate the value of his wisdom. It is ironic that many analysts espouse a strategy that is the complete opposite to making money in the stock market, promoting buying when a stock is expensive, and encouraging selling when it is cheap. I thought the name of the game was to buy low and sell high; evidently, analysts do not always see it that way.

Bottom line: The shares are beat up and way oversold. They have dropped too far in too short of a time. The shares are due for a nice bounce. This is certainly not the time to be chicken about buying Tyson Foods.

Disclosure: Long