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Tyson Foods Kept at Neutral

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We recently reiterated our Neutral recommendation on Tyson Foods Inc. (TSN - Free Report) . The company delivered better-than-expected second-quarter fiscal 2012 earnings of 44 cents per share, exceeding the Zacks Consensus Estimate of 38 cents by 15.8% as well as the prior-year earnings of 42 cents by 4.8%. The outperformance came on the back of strong performance of processed foods and pork segment.

Tyson Foods has a significant presence in the international market. Key international markets include Canada, Central America, China, the European Union, Japan, Mexico, Middle East, South Korea, Russia, Taiwan and Vietnam.

The company adds value to its portfolio by continuous innovation, the most recent of which include Tyson whole grain chicken chunks, and Tyson Stuffed Mini Bread Bowls in the grocery channel, along with Tyson Grilled Chicken Tenderloins in the club store channel.

However, the company faces some long-term challenges. Possibilities of outbreaks in livestock diseases such as bird flu or H1N1 pandemic would adversely affect the company’s operations and profitability. The probable presence of mad cow disease in one of the Californian farms announced by the U.S. Department of Agriculture (USDA) affected beef demand, and U.S. beef exports plunged soon after the announcement was made.

Similarly, beef demand fell over the ‘pink slime' controversy, and many food stores like McDonald’s Corp. (MCD - Free Report) and The Kroger Co. (KR - Free Report) who buy products from Tyson, stopped purchasing ground beef with the controversial meat filler. Moreover, widespread anti-obesity campaigns are discouraging consumption of meat products.

Skyrocketing input prices are posing great difficulty for the company. High price of cattle has lowered operating margin and volume in the beef segment for the past few quarters. Moreover, USDA has predicted bad harvest of corn and soybeans in Brazil and Argentina for the coming quarters, which will consequently increase the feedstock price for Tyson and thus affect its margin negatively.

The company did not provide a bright outlook for the year ahead. Tyson believes that the overall domestic protein (chicken, beef, pork and turkey) production is expected to decrease in fiscal 2012 compared with that in fiscal 2011. The fall in production will be due to lower availability of cattle domestically, owing to increased exports of cattle.

Based in Arkansas, Tyson Foods Inc. is a global distributor and seller of chicken, beef, pork, prepared foods and related allied products. Its products are marketed and sold primarily to grocery retailers, grocery wholesalers, meat distributors, military commissaries, industrial food processing companies, chain restaurants, international export companies and domestic distributors.

Currently, Tyson carries a Zacks #2 Rank (short term Buy rating).

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