Is the Worst Over for Tyson Foods?

| About: Tyson Foods (TSN)

The world’s largest meat producer, Tyson Foods (NYSE:TSN), reported a very respectable third quarter performance on Monday evening. Far better than last year’s 3 cents per share of EPS, Tyson reported 35 cents this quarter, even beating consensus analysts’ estimates by 50%. Sales fell almost 3% for the quarter, but the company more than made up for that with increased prices and stringent cost management. Sales of chicken was a bright spot accounting for 36% of revenue, but pork and beef divisions also turned a profit. Tyson was able to reduce inventory and working capital for the second straight quarter in anticipation of potentially soft demand for meat in the fiscal fourth quarter. Two weeks ago, shares were sent downwards because of an analysts call that demand for chicken will likely fall in the next quarter. The market’s response to yesterday’s positive quarter has thus far been a little bit tepid, as shares are up only 2% in morning trading.

TSN Tyson became a stronger company over the last quarter, as earnings were great and sales were decent. The company reduced debt over the previous quarter by $152 million. The company’s balance sheet is much improved over where it was just a year ago. Through the first nine-months of this fiscal year Tyson has produced nearly 20 times the amount of cash flow from the same period last fiscal year. Reducing inventory has helped this metric greatly, but so has lower feed and SG&A costs.

The recent analysts’ calls for lower demand for chicken in the quarter ahead took a toll on the stock sending shares down 9% in a day, but it seems a strange time for this prediction. The Deutsche Bank analyst claims the lower feed costs will contribute to greater chicken weight as demand is faltering, and industry experts believe that July and August are expected to be weak. However, you could make the argument that because of the prior inventory reductions, a greater yield on cheaper input prices in not a bad thing at all. In my research, I have not come across why the analysts are expecting demand to be weak in the late summer months. Personally, I think of those months as prime grilling season. Furthermore, with the economy showing significantly positive signs of recovery, I would expect more consumers will be eating meat products and could be more price elastic than in the last few months to boot.

This quarter’s results are a positive sign for the direction of Tyson, and if the price slips much further than it could be a real opportunity. Our most recent ratings change, was from Overvalued in the $13-$14 range to Fairly Valued recently. We can see now that the company is in better position than we expected them to be when we had the negatively valued. We will likely maintain the stock as our neutral rating, unless it slips to around $10 per share, which could be wishful thinking at this point. The fundamental trends are moving in the right direction, and even though the value play is not exactly what we are looking for; we think the stock has the potential to be at $14 in the coming months.

Original post