No Reason to Be Chicken-Hearted
| SATURDAY, SEPTEMBER 17, 2011
NEIL A. MARTIN
Tyson shares have been plucked
recently, on the continuing woes of the poultry business.
But the pummeling has set the stage for a comeback in
the peripatetic CEO of Tyson Foods, America's top poultry
and beef producer, likes to nose around his company's
research complex, called Discovery Center, to see what's
center, at Tyson's headquarters in Springdale, Ark.,
boasts 19 research kitchens and draws chefs and customers
from around the world. The aim, says the 51-year-old
Smith, is "to collaborate with customers to create
new foods and bring them to market more quickly."
days, Tyson could use new ideas, as the chicken
business labors against a backdrop of high feed
prices, overproduction, mediocre demand and soft
pricing. This has weighed on the company's shares
(ticker: TSN), which recently were around 17.50
after trading at about 20 in the spring. But for
long-term investors, the decline presents an opportunity
because there's more to Tyson than chicken. For
one thing, its beef and pork businesses remain
strong. In fact, the company is on track to deliver
the second-highest earnings per share in its history
in fiscal 2011, which ends on Sept. 30. And when
the chicken cycle turns—and bulls think it will
in 2012—Tyson is likely to emerge as an even stronger
competitor in a poultry industry winnowed by the
economic downturn. Fans of the stock argue that
it could rise by at least 20% over the next 12
on opportunities and finding new ways to do things is
very much a part of Tyson's culture. The company was
born in 1936, when founder John W. Tyson discovered
that it was twice as profitable to sell chickens in
Chicago as in his home state of Arkansas. He bought
some trucks and began regular runs to the Windy City.
decades, under Don and his son, John, now Tyson's chairman,
the company has become the world's second-largest food-production
outfit, behind Archer Daniels Midland. It's the No.
1 processor and marketer of chicken and beef in the
U.S., with 22% of each market, and No. 2 in pork, with
17%. Chicken accounts for about a third of its revenue;
beef, 41%, and pork, 13%. The rest comes from its prepared-foods
division, which sells things like soups, sauces, stews,
tortillas and pizza toppings.
in an effort to lessen its dependence on food, Tyson
established a joint venture, Dynamic Fuels, with synthetic-fuel
maker Syntroleum. It uses grease and fats to make renewable
diesel and jet fuel. Last June, KLM Royal Dutch Airlines
became the first airline to operate a commercial flight
on "biokerosene" from Dynamic.
who holds a degree in animal science from the University
of Tennessee, Tyson has ramped up its global ambitions
and now operates in Mexico, India, Brazil and China.
Its goal is to eventually be as big in chicken, pork
and beef abroad as it is in the U.S.
it must work its way through the domestic poultry market's
current malaise. And although the overall picture still
isn't bright, there are some slivers of light.
ONE THING, FEWER EGGS are being produced, which
means fewer birds will be hatched. "The industry
has seen 17 consecutive weeks of declining egg [shipments],
and it looks like these cutbacks are finally resulting
in declining production levels," says Jeffrey Farmer,
an analyst with Jefferies in New York City. While chicken
production was up 5% in June, it was flat in July and
was down more than 3% in August. No decline that large
had been seen since October 2009, he notes, adding that
this has helped push chicken prices up 12% over the
past five weeks.
also says that, while the industry's gross margins slid
to 20 cents a pound in February—a 10-year low—they averaged
24 cents to 26 cents a pound for most of the past three
months and recently hit 28 cents. Farmer rates Tyson
a Buy, with a 12-month target price of $20.
positive: Excess production should put downward
pressure on the price of corn, the main cost input
for poultry producers. Over the past five years,
the price of corn has fluctuated between $3.50
and $8; it's recently been around $7.00. But the
high price of corn has encouraged heavy planting
in Latin America and the U.S. Some analysts say
that this could result in a glut of 1.5 billion
to two billion bushels, putting downward pressure
on corn next year.
Shawn Hackett, a commodities authority and president
of Hackett Financial Advisors in Boynton Beach,
Fla., "By the back half of 2012, corn futures
should be in the $4-to-$5 range. You could see
feed prices dropping 20% to 30% from where they
were, while poultry prices could go up 50% easily,
if not more, which will result in dramatic profitability
for producers," which could last for two
or three years.
he asserts that Tyson's stock—which hasn't been trading
much above book value lately—could easily double over
12 to 18 months.
hopes that Hackett is a seer. Hammered by the unfavorable
supply-demand ratio in its chicken business, the company,
whose fiscal year ends Sept. 30, lost $215 million,
or $1.44 a share, on $26.7 billion in sales in fiscal
2009. It bounced back in fiscal 2010, aided by an effort
to make its operations more efficient; the company says
it squeezed out $600 million in costs at its chicken
unit alone in 2010, and it will have eliminated another
$200 million by the end of this year.
helped Tyson earn $1.56 billion, or a record $2.06 a
share, on $28 billion in revenue. The Wall Street consensus
is that the meat processor will report earnings of $1.95
a share for this fiscal year, on sales of $32 billion.
For 2012, the consensus forecast calls for $1.98 a share
on $34 billion in sales.
of that is being driven by Tyson's beef and pork
businesses, which differentiate it from rivals
like Sanderson Farms (SAFM),
a pure-play chicken producer that Barron's covered
last month ("This Stock Could Really
Lay an Egg," Aug. 22).
a third-quarter conference call, Chief Operating
Officer Jim Lochner noted that Tyson's pork segment
continued to perform very well, with an 8.8% return
on sales and operating income of $124 million
during the period. U.S. pork exports this past
May were nearly 13% higher than a year ago, and
Tyson is accounting for more of them.
beef operation also did well and continues to
grow, with a 4% return on sales and an operating
income of $140 million for the quarter. U.S. beef
exports in May were 15% higher year-over-year.
"As with pork, our share of the growing beef
export market has increased," Lochner said.
didn't disclose its specific share of beef or pork exports.
still under pressure, Tyson's chicken segment had a
1% return on sales, with $28 million in operating income.
Although these numbers certainly are nothing to boast
about, Lochner says he is "pleased our chicken
business remained profitable in such a difficult operating
Tyson's longer-term outlook is a solid balance sheet,
with $1 billion in cash, and $1.5 billion in net
debt. This gives it the wherewhithal to carry out
its plan to repurchase 22.5 million shares by an
unspecified date. In the third quarter, it bought
back some 4.4 million shares for about $80 million.
Tyson pays a modest dividend of 16 cents a share,
producing a yield of less than 1%.
an interview at Tyson's headquarters, CEO Smith said,
"The efficiency improvements we'vemade over the
past several years have made our operations very competitive…And
looking ahead, there seems to be improvement in market
fundamentals, although the next few months will remain
investors who can look beyond the rough patch should
be rewarded. Based on its prospects, there's no need
to be chicken-hearted about betting on Tyson.