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Summary

  • Tyson Foods reported mixed third-quarter numbers due to operational disturbances, but investors should look at the long run.
  • Tyson's acquisition of Hillshire, and its simultaneous move to cut its debt are positives that investors should not ignore.
  • Tyson's focus on operational efficiencies will also push up earnings, and a cheap valuation is another reason why it is a stock worth considering.

Tyson Foods (NYSE:TSN), has had a roller coaster ride in 2014. However, the stock has gained more than 11% so far despite tough competition in the space, along with a number of challenges that have cropped up this year. But, Tyson has run into a problem once again as its third-quarter results were not up to the mark.

Although Tyson saw higher demand for its chicken and pork products, all was not well with the bottom line performance. Its revenue for the quarter increased 11% to $9.63 billion from last year, above the consensus estimate of $9.5 billion. Although its earnings rose 9% to $0.75 per share from the year-ago period, Tyson missed the estimate by $0.03 per share.

However, the good thing is that Tyson is looking to maintain consistency. Going forward, the company anticipates 10% growth in its earnings for the upcoming quarter.

Smart moves will aid future earnings growth

In addition, Tyson is also working to reduce its debt by selling its Latin American chicken operations. It will be selling its Mexican and Brazilian chicken operations to rival JBS for $575 million. According CEO to Donnie Smith, "Although these are good businesses with great team members, we haven't had the necessary scale to be a market share leader in either country." The money from this sale will be used to reduce Tyson's debt associated with the purchase of Hillshire Brands.

Hence, Tyson seems to be making the right moves to pare down the debt and streamlining its operations. This is important for the company, as it will need cash for the impending acquisition of Hillshire Brands, which it is purchasing for $7.7 billion. Tyson had debt of around $2 billion at the end of last quarter, and a cash position of $440 million. The company plans to repay the debt that it will be assuming to acquire Hillshire as fast as possible. Hence, the sale of its non-performing units is a step in the right direction.

Overcoming challenges

Tyson, however, has faced a number of operational challenges in recent times. For instance, in February, a fire broke out at one of its fully-cooked processing plants. Although no one was injured, but the infrastructure damage affected its ability to supply products. In addition, there were operational issues during the quarter with a fully cooked processing plant, which led its production volumes to decline. But, in spite of all these challenges, Tyson reported good numbers.

Looking ahead, the company is positive regarding its prospects. It has completed infrastructure repair at the fire site, and new equipment has been installed at the fully cooked processing plant. Although there will be a mild effect of these disruptions in the fourth quarter, but in the next fiscal year, the company is expected to be at its full production capability.

Hillshire benefits and more

Moreover, the acquisition of Hillshire Brands, the maker of Jimmy Dean sausage and many other brands, will be another growth driver going forward. In a statement to the press, management said, "We expect to realize substantial synergies from the combination of our Prepared Foods business with Hillshire. Synergies are expected to come from operational improvements, purchasing and distribution."

Along with the synergies, Tyson will also benefit from an improving cost structure. Management has been taking steps to lower costs. For example, Tyson recently announced that it will close three of its plants, incurring a $49 million impairment charge. However, management cites that these are only short-term pains, and in the long run, the closures will improve capacity utilization and streamline its cost structure. An important thing to note is that these closures will not have any effect on Tyson's sales volume, since the company would shift production to more efficient facilities.

Going forward, management expects the next fiscal to be another record year for sales. Also, margins in the prepared foods segment are also expected to improve. With the inclusion of Hillshire Brands, Tyson will achieve synergies from operational improvements, purchasing, and distribution.

Conclusion

Moreover, Kroger also has an enticing valuation. It has a trailing P/E of 15.04, which is better than the industry P/E of 22.83. Also, with a forward P/E of 12.84, it is clear that its earnings are expected to improve going forward. Therefore in the light of all these facts investors can consider adding Tyson Foods to their portfolio. Finally, Tyson is expected to grow above the industry average in the next five years, clocking an earnings CAGR of 19% as compared to the 13.6% industry average.

Hence, it will be a good idea for investors to look beyond Tyson's recent earnings miss and focus on the long-term prospects.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Tyson Foods: Strong Earnings Growth In The Cards Due To Smart Strategies