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Tyson (TSN) Down 3.8% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Tyson Foods (TSN - Free Report) . Shares have lost about 3.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Tyson due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Tyson Foods Q3 Earnings Beat Estimates, Sales Miss

Tyson Foods posted third-quarter fiscal 2020 results. Nevertheless, earnings topped the consensus mark. Also, in a separate press release, management named Dean Banks as the company’s new CEO, who will succeed Noel White on Oct 3. Notably, Banks will continue to serve as the company’s president, while White will serve Tyson Foods as the executive vice chairman of the board of directors.

Adjusted earnings for the reported quarter were $1.40 per share, beating the Zacks Consensus Estimate of 90 cents. However, the bottom line declined 5% year over year. Net sales declined 7.9% to $10,022 million. Also, the top line fell short of the Zacks Consensus Estimate of $10,605 million.

Gross profit for the quarter came in at $1,313 million, down 1.7% from the prior-year quarter.  Tyson Foods’ adjusted operating income decreased 4.5% to $760 million. During the quarter, the company incurred $340 million as direct incremental expenses associated with COVID-19. These include escalated costs related to workers’ health, such as personal protection equipment, sanitization of production facilities, testing for coronavirus, various professional fees and bonuses to frontline workers. Apart from these, certain indirect COVID-19 costs like raw materials, transportation, underutilization and reconfiguration of plant, premiums offered to cattle producers and discounts on pricing dragged results.

Segment Details

Beef: Sales in the segment dropped 12.1% to $3,653 million. Sales volume declined 23.8% year over year due to reduced production throughout the quarter stemming from coronavirus. Also, a fall in live cattle harvest capacity due to a temporary facility closure for most parts of the first quarter due to a fire breakout hampered results. Average sales price saw a rise in the quarter, thanks to higher demand amid supply hurdles amid the pandemic.

Pork: Sales in the segment dropped 15.7% year over year to $1,115 million. Sales volume fell 16.5% year over year due to reduced pandemic-led production, even though demand was robust and there was higher availability of live hogs. Average sales price rose due to the same factors that drove pricing in the beef segment.

Chicken: Sales in the segment dropped 6.6% to $3,112 million. Sales volume declined 4.2% on account of lower production and soft foodservice demand, somewhat countered by higher consumer product volumes. Average sales price in the quarter declined due to weak chicken prices stemming from tough market conditions.

Prepared Foods: Sales in the segment slipped 2.6% to $2,035 million. Prepared Foods’ sales volume fell 6% as volume growth in the consumer products business was countered by softness in the foodservice channel and reduced production. Average sales price increased on account of favorable product mix and pass-through of higher raw-material costs.

International/Other: Sales in the segment were $402 million, up 12.9% from $356 million reported in the prior-year quarter. Sales volume improved 25%, whereas average sales price declined.

Other Financial Updates & Outlook

The company exited the quarter with cash and cash equivalents of $1,365 million, long-term debt of $11,270 million and total shareholders’ equity (including noncontrolling interests) of $15,004 million. In the first nine months of fiscal 2020, cash provided by operating activities was $2,708 million. Management projects capital expenditure to be approximately $1.2 billion for fiscal 2020 and fiscal 2021.

For fiscal 2021, USDA expects overall domestic protein production (chicken, beef, pork and turkey) to rise about 1% year over year. Management expects food and protein demand to shift among different sales networks and witness short-term hiccups amid the pandemic. Nonetheless, worldwide demand is expected to increase over time.

The company is battling several hurdles related to the pandemic, which are expected to elevate its operating cost burden and weigh on volumes in the remainder of fiscal 2020 and also fiscal 2021. Tyson Foods expects to continue facing a slowdown in capacity utilization at its production facilities due to member shortages. Moreover, though every segment is seeing a demand shift from food service to retail, retail volume increases have not been enough to compensate for soft foodservice volumes. Consequently, management expects volumes to decline in the fourth quarter of fiscal 2020, especially in its Chicken and Prepared Foods units.

While the company is unable to forecast the impacts of COVID-19 on its short and long-term demand, management said that it is well placed in terms of liquidity to run its business and meet obligations. The company expects its total liquidity to stay above the minimum target of $1 billion.

In the beef segment, USDA projects domestic production to grow about 3% in fiscal 2021. In the fiscal, management anticipates adequate supplies in the markets where its plans operate.  For pork, domestic production is likely to rise about 1%, per the USDA. Further, USDA forecasts domestic production in the Chicken segment to be flat to a slight increase from the fiscal 2020 level. In the Prepared Foods segment, the company expects to remain focused on responding to the changing consumer behavior as it goes into fiscal 2021. Finally, the company expects better results from its operations in the International/Other segment.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -11.58% due to these changes.

VGM Scores

At this time, Tyson has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Tyson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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