Plagued by headwinds such as commodity cost volatility, rising freight expenses and uncertain tariff environment, food companies like Tyson Foods, Inc. (TSN - Free Report) are walking a tight rope. In fact, investors have lost optimism on this well-known meat and chicken products company. This is evident from the stock’s 24.6% plunge in the past year compared with the industry’s 11.7% decline. Nevertheless, the company is focused on boosting portfolio strength through acquisitions. It also concentrates on enhancing financial capabilities through cost optimization.
That said, let’s take a closer look at both the aspects of the story and see if the upsides can help revive this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Acquisitions: Key Growth Driver
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. Notably, the company has completed the buyout of the Keystone Foods business, which supplies a broad array of meat and chicken products across the globe. The move is likely to bolster’ 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.
Additionally, the company 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. Markedly, rising demand for protein-packed food products is a fueling factor for higher protein production.
Can Savings Efforts Pare Headwinds?
Volatile market conditions for chicken and pork is a worry for Tyson Foods. These units have been affected by fluctuations in domestic and export prices of chicken and pork, due to uncertainties in trade policies and raised tariffs. Thanks 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 are 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 struggling against rising freight as well as transportation costs.
Nevertheless, Tyson Foods’ strategies to boost financial strength is expected to provide some relief against the aforementioned headwinds. We note that the company is progressing well with the Financial Fitness Program, which was announced in the latter half of 2017. This initiative strives to 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.
Although there are significant hurdles in Tyson Foods’ path, the aforementioned factors indicate the presence of adequate growth prospects. We expect that the company’s strategic efforts will uplift investors’ sentiments.
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