Like most food companies Tyson Foods, Inc. (TSN - Free Report) has been struggling with volatile market conditions, especially in the pork category. Moreover, rising labor and freight costs are concerns. Nevertheless, the company is focused on boosting portfolio strength through acquisitions. It also concentrates on enhancing financial capabilities through cost optimization. Let’s take a closer look at these aspects and see if they can help the company to overcome the hurdles in 2019.
Acquisitions to Boost Portfolio
Tyson Foods is focusing on acquisitions to expand portfolio. In fact, acquisitions led to a 2.7% year-on-year growth in sales volumes during the fourth quarter of fiscal 2018. Acquisitions also drove chicken sales volumes in the said period. Notably, the company completed the acquisition of the Keystone Foods business, which supplies a broad array of meat and chicken products across the globe. The move is likely to bolster Tyson Foods’ international presence with improved sales as well as distribution network in growth markets. Notable acquisitions in the past include AdvancePierre, Original Philly Holdings, Hillshire as well as Mexican food restaurant chains, Circle Foods and Don Julio Foods.
Apart from this, the company is steadily expanding fresh prepared foods offering to cater to consumers’ rising demand for natural fresh meat offerings without any added hormones or antibiotics. In this respect, the buyout of Tecumseh Poultry is quite noteworthy.
We note that Tyson Foods’ endeavors to boost portfolio through well-chalked buyouts fits well with rising demand conditions for protein-packed food products. In fact, the company has also divested the non-protein businesses (such as Sara Lee Frozen Bakery, Kettle and Van’s) to focus more on the growing protein-packed food arena. Moreover, for fiscal 2019, the USDA expects overall domestic protein production (chicken, beef, pork and turkey) to rise roughly 3% year over year.
Savings Initiatives Bode Well
Tyson Foods is also focusing on boosting financial strength through the Financial Fitness Program, which was announced in the latter half of 2017. This initiative will enhance operating and supply-chain efficiencies as well as reduce overhead costs. Notably, the company successfully generated savings worth $253 million through the program in fiscal 2018. Management expects the program to generate savings worth $400 million in 2019 and $600 million by 2020. Majority of these savings are expected to benefit the Prepared Foods and Chicken segments.
Will Efforts Counter Hurdles?
In spite of well-chalked efforts, Tyson Foods is walking a tightrope, thanks to volatile market conditions for chicken and pork. These units have been impacted by fluctuations in domestic and export prices of chicken and pork, due to uncertainties in trade policies and raised tariffs. Due to such factors, the company is struggling to balance demand and supply conditions in the pork category.
Additionally, the company is witnessing escalated freight expenses. Notably, higher freight costs have been negatively impacting operating income in the Beef, Chicken, Pork and Prepared Foods segments for a while. Other food companies like United Natural Foods (UNFI - Free Report) , McCormick & Company (MKC - Free Report) and TreeHouse Foods (THS - Free Report) are also struggling against rising freight as well as transportation costs.
We note that such headwinds along with narrowed earnings projection for fiscal 2019, have hurt investors’ sentiments. Evidently, shares of Tyson Foods have lost 36.2% year to date compared with the industry’s decline of 22.1%.
Nevertheless, we believe that Tyson Foods’ strategic moves in the protein-rich space position it well for the long term. Further, the company’s saving plans are expected to help cushioning the negative impacts of mounting expenses. All said, we expect such factors to uplift the Zacks Rank #3 (Hold) stock in 2019.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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