The Sky Is Falling On Tyson Foods

| About: Tyson Foods (TSN)

Summary

TSN was a great recommendation a year and a half ago, but I called it overvalued last quarter.

Results are out and the stock is getting hammered.

I discuss what I think of the name near and long term.

About a year ago I wrote about Tyson Foods (NYSE:TSN) and I discussed that it was one of the largest food companies in the United States, and has been in business for 70 years. It is a powerhouse in its sector. After looking into the company, I had essentially given the stock a hold, but did bless buying on some dips. Well, today the sky is falling on the stock, down about 15% on earnings news.

Why? Well the quarter was rough, the CEO is leaving and the outlook is shaky. The stock was getting ahead of itself so this retracement, while extremely painful for those holding, sets up potential long-term entry points or add-on opportunities, once the dust settles. In my last article I had stated "I feel it is a little ahead of itself given its valuation relative to performance. What do I mean? Well we should look at sales and recent performance". Which I went on to elaborate were not strong. Here in the company's fourth quarter, the weakening continued.

Like any other report we have to look under the hood. Year-over-year, the company saw sales that were down 6.1% to $9.16 billion in fiscal Q4 2016. These revenues were down year-over-year and handily missed estimates by $220 million. Of course some of this weakness year-over-year on an absolute basis stems from the currency issues associated with a stronger dollar that are plaguing domestic companies, but also there were issues with volumes this quarter. That said, despite the decline in revenues, the company delivered a strong for Q4 operating income margins and strong income overall. In fact, operating income spiked 7% to $586 million. The company also saw its adjusted earnings per share come in at $0.96 per share, up a strong 16% over last year's $0.83. So where exactly did these earnings come from? Well we need a segment by segment breakdown to understand the most recent quarter in more detail.

As always, let's start with the flagship product in chicken. Tyson saw sales volume and average sales prices that were down 10.1% and up 3.5% respectively, year-over-year. In Q4 2016, the company saw sales of $2.811 billion versus $3.024 billion last year. With this sales decline, operating income decreased in Q4 2016 to $220 million versus $370 million in Q4 2015. Sales volume decreased as a result of optimizing mix and the buy versus grow strategy, partially offset by an increase in rendered product sales. In addition there was an extra week last year and that made a strong difference. Average sales price increased in the quarter thanks to sales mix changes but decreased somewhat as feed ingredient costs declined, partially offset by mix changes. There was higher demand as well. Operating income increased due to improved operational execution and lower feed ingredient costs.

The price of beef for consumers continues to be out of control, though it starting to come down. I have said it before and will say it again. It has gotten cost prohibitive to feed a family of 5 a steak dinner consisting of high quality cuts. This is the one commodity that concerns me as too high a price can hurt demand. There was some reprieve for consumers as the average sales price was down nicely year-over-year (down 14.69%). Sales were down to $3.477 billion from $4.095 billion. Lower prices hurt but there was also a decline in sales volumes. Volumes were down 0.3% year-over-year.

The pork segment was also once again very positive in terms of operating income despite a sales decline volume wise. Revenues were up slightly to $1.27 billion from $1.21 billion last year. This is because sales prices were up more than offsetting declines in volumes. Sales volume was down 1.7% while sales prices were up 7.2%. Further, operating income jumped to $122 million from $64 million in last year's quarter. Operating income however was positive $139 million versus a loss of $20 million last year.

Turning to prepared foods, the company saw declines slightly. Average sales price decreased while volumes increased. There were increases in key meat prices. Revenues were down, coming in at $1.837 billion versus $1.865 billion last year. However, with slightly increased operation expenses, operating income narrowed in this sector, coming in at $133 million versus $177 million last year. This pressured margins to 7.2% versus 9.2% last year.

At the end of the day this was certainly a weak quarter with a top and bottom line misses and declining performance in nearly every category. Looking ahead to initial projections for fiscal 2017, the Street is spooked and the sky is falling on the stock. The company expects GAAP earnings per share growth of 4 to 7%, which is lower than what most were expecting, as well as adjusted earnings growth of 7-10%. While 2016 was a record year for prepared foods, the prices of commodities are stabilizing and pressuring margins. There were also record cash flows. It was a strong fiscal year, but the general belief is that this may have been the peak. Now despite a fear on performance near-term, the company repurchased 28 million shares and increased its quarterly dividend, again. The company continues to increase to believe it will increase dividends by $0.10 annually. Still, I would hold the name, but under $50, this stock is attractive.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.