We reaffirm our Neutral recommendation on meat producer, Tyson Foods Inc. (TSN - Analyst Report), despite solid third-quarter fiscal 2013 results, as we await a rebound in the Beef and Pork segment.
Why the Reiteration?
On Aug 15, 2013, Tyson delivered solid third-quarter fiscal 2013 results wherein earnings beat the Zacks Consensus Estimate as well as the prior-year quarter earnings by 17.0% and 35%, respectively. The company's lower share count and lower chicken feed costs led to the earnings upswing in the quarter.
Tyson managed to post modest net sales gains of 5.7% backed by the strong sales in the Chicken and Beef segments. Sales also beat the Zacks Consensus Estimate of $8.6 billion. Operating income inflated following the fall in corn prices due to record harvest in 2013. However, cattle and pork feed saw a price hike during the period following drought conditions in the U.S.
Overall, Tyson’s product and geographical diversity offers it the stability to maintain sales and margin. Moreover, the company’s bright prospects in the emerging market helps it to maintain top line sales growth despite the macroeconomic headwinds faced by the developed nations.
We are optimistic about Tyson’s future in the fast growing market in China in the coming quarters, The outbreak of avian influenza ("bird flu") in China has prompted people to refrain from buying local chicken products. This has opened up new opportunities for Tyson to increase export to China.
Moreover, the World Trade Organization passed a ruling stating that the tariffs imposed by China on certain imported American chicken products went against international fair trade practices. Tyson can now boost export to China in the coming quarters.
However, the company’s prepared foods segment has been sluggish of late as the macroeconomic headwinds have reduced the discretionary spending of the consumers. This has resulted in the reduction of traffic and sales at the restaurants. Moreover, the outbreak of livestock diseases and import regulations imposed by several governments like Japan on meat products from the U.S. poses a threat to Tyson’s export during the coming months.
Other favorable stocks in the consumer staples sector include Pinnacle Foods Inc. (PF), Green Mountain Coffee Roasters Inc. (GMCR - Analyst Report) and Boulder Foods Inc (BDBD - Snapshot Report). While Pinnacle Foods and Green Mountain carry a Zacks Rank #1 (Strong Buy), Boulder Foods carries a Zacks Rank #2 (Buy).