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We reaffirm our Neutral recommendation on Tyson Foods Inc. (TSN - Analyst Report). While the company has been delivering solid quarterly results, lower corn prices are offset by skyrocketing cattle prices, thus pressurizing margins.

Why the Reiteration?

Tyson posted better-than-expected results in three out of the last four quarters. Product innovation, expansion strategies and cost savings program have remained the company’s strong points. However, the rising prices of cattle may pressure the margins in the coming quarters.

Tyson is positioned as one of the world’s leading meat processors and has a strong presence in beef, pork, chicken and processed food products categories. This acts as a buffer for the company’s sales and margins — if one category fails, the other can overcome. Similarly, the company is stretched over a vast geographical expanse in North America, Canada, Europe, Asia, Middle East and Russia, which helps it to maintain sales and margins.

Moreover, Tyson has bright prospects ahead as management expects profit to rise for the coming fiscal years. Lower corn prices and higher chicken supply leading to a decline in chicken prices, is expected to boost profits.

It expects top-line sales growth in the range of 3%–4%, value-added poultry and prepared foods to grow within 6% to 8% and international business to grow in the 12%–16% range for fiscal 2013–2015. The company expects to grow its business in China, India and Mexico in mid double-digits by 2014.

Tyson adapts itself to the changing demand of consumers. It conducts regular market research surveys and modifies its product line-ups accordingly. As an increasing number of health conscious U.S. consumers are focusing on nutritious breakfasts, Tyson considers it a high potential category. In fiscal 2013, the company has come up with two breakfast launches under Tyson Day Starts brand that will include biscuit sandwiches, flat breads, and wrapped omelets and Wright Brand breakfast sausage.

However, the high price of cattle has lowered operating margins and volumes in the Beef segment over the past few quarters. Moreover, severe drought conditions in 2012 forced farmers to reduce their herd thus squeezing cattle supply.

Cattle prices have been projected to rise by U.S. Department of Agriculture for 2014. Lower corn prices aiding lower feed costs are being offset by higher cattle prices. This is expected to further increase input costs in fiscal 2014 for cattle and hog producers.

Again, ongoing macroeconomic headwinds are compelling consumers to reduce their discretionary spending because of the low disposable income. As a result, traffic at restaurants are falling year over year.

Moreover, traffic at restaurants are expected to reduce further in 2014 compared with the 2013 level due to higher gas prices, payroll taxes, bad weather and economic uncertainty. This is affecting the demand for Tyson’s products.

Tyson has a Zacks Rank #3 (Hold). However, better-ranked stocks in the retail sector include Hormel Foods Corp.oration (HRL - Analyst Report), Con Agra Foods Inc. (CAG - Analyst Report) and Green Mountain Coffee Roasters Inc. (GMCR - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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