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Sturdy Top-Line Trend to Aid Tyson Foods, High Costs a Woe

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Tyson Foods Inc. (TSN - Free Report) has been witnessing year-over-year growth in the top line for quite some time now, largely owing to its efforts to strengthen its protein-packed brands as well as focus on strategic buyouts.

The robust top-line growth trend was retained in the second quarter fiscal 2018, wherein improved Beef, Chicken and Prepared Foods sales were major drivers. Further, the Prepared Foods category has been depicting solid growth in particular, owing to rising demand for protein-packed brands and positive synergies from the acquisition of AdvancePierre.

Notably, the company’s AdvancePierre buyout has been favoring the Prepared Foods segment for a while. The acquisition led to a 10.9%, 11.6%, rise in sales volume for the segment during the second and first quarters of fiscal 2018, respectively. Prior to this, it rose 2.4% during the third quarter and 9.5% in fourth-quarter fiscal 2017. Further, the company expects incremental sales of approximately $1.1 billion from AdvancePierre during fiscal 2018.

Other notable acquisitions that have been driving Tyson Foods’ top line include; Tecumseh Poultry, Original Philly Holdings, Hillshire as well as Mexican food restaurant chains, Circle Foods and Don Julio Foods.

Tyson Foods is also gaining from its solid efforts to expand its protein-packed brands amid the rising protein demand. In this regard, the company has invested in Memphis Meats and Beyond Meat. It has also undertaken divesture of non-protein businesses (such as Sara Lee Frozen Bakery, Kettle and Van’s) so as to focus more on the growing protein-packed food arena.

These endeavors are likely to help the company reap the benefits of rising protein demand. For fiscal 2018, USDA expects overall domestic protein production (chicken, beef, pork and turkey) to rise roughly 3% year over year. Moreover, Tyson Foods anticipates fiscal 2018 sales to increase nearly 6% in the range of $40-$41 billion, courtesy of higher revenues from AdvancePierre; increased volumes in its legacy business and enhanced mix in the Chicken segment.

High Cost Burden

However, Tyson Foods has been witnessing higher freight expenses which negatively impacted operating income across Beef, Chicken, Pork and Prepared Foods segments during the second quarter of fiscal 2018. The company expects these hurdles to linger, which remains a threat to its profits. Such factors have also been dragging investors’ optimism. Evidently, shares of Tyson Foods declined 2% in the past one month, compared with the industry’s drop of 0.8%.

Nevertheless, the company remains on track with its Financial Fitness Program, which aims to generate total savings of roughly $200 million in fiscal 2018, $400 million in 2019 and $600 million in 2020. We are hopeful that this program will help offset the above-mentioned cost woes in the near future.

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Shiseido (SSDOY - Free Report) with a long-term earnings growth rate of 5%, carries a Zacks Rank #1.

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