Tyson Foods, Selling Chicken With Bling

Tyson Foods is benefiting these days from rising protein prices and cost cutting measures within its operations.

(Stocks in article: TSN, PPC, SAFM)

Tyson Foods (NYSE: TSN), the world’s most important processor and marketer of beef, chicken and pork, reported a stellar fiscal third quarter in late July. Tyson earned $0.31, versus a loss of $0.15 in the prior year period, and blew away the analysts’ consensus of $0.25. In doing so, Tyson grew revenues in each of its segments, while also expanding operating margins within each.

So how does a protein supplier do so well at a time when feed costs are rising? Well, it helps that it’s been relatively easy for Tyson to push price increases through to its customers, who in turn have pushed through food inflation to consumers. It also helps that Tyson has taken significant cost savings measures that look to be paying off early.

TSN reported revenue growth of 9%, even as sales volume declined 4%, due to plant sales and closures. Price increases of 13.5% more than made up for that. Chicken led all price gainers higher, rising some 18.8%, while beef prices increased 13%. While prices rose, TSN also benefited from cost cutting efforts that were reportedly running ahead of pace. Soon, Tyson’s plan should save the company some $200 million a year.

The company indicated that Asian demand played role in its growth. Export sales rose 31%, driven by sales of chicken and pork to China and other parts of Asia. We speculate that as China industrializes, agricultural production should decline and demand for American sourced proteins should rise. That’s not to mention the effects of population growth!

Going forward, the food industry continues to speculate that overseas demand for American beef should increasingly benefit from the removal of international import restrictions. Tyson also expects to see a significant benefit from the sale of its antibiotic free meats in future periods. Management’s confidence led it to raise its fiscal 2007 (Sep) EPS guidance range to $0.82-$0.92 a share.

We see continued good times ahead for meat eaters and Tyson alike. Tyson's outlook is tough to call no doubt, due to the volatile price of proteins. Analysts are generally forecasting a tame long-term growth rate, but Wall Street Greek believes food prices are now impacted by secular factors, not seasonal, and should continue pricey. Therefore, we do not view TSN's P/E ratio of 15X its fiscal '08 consensus estimate of $1.31 as excessive. Just remember, it only takes one flu stricken dead pigeon, duck or chicken on a sidewalk in Manhattan, or farm in Jersey, to leave chicken packs piling up on supermarket shelves. But, at least in that case, TSN will see higher demand for its pork and beef products driving up price. Tyson's competitors, Pilgrim's Pride (NYSE: PPC) and Sanderson Farms (NASDAQ: SAFM) can't say the same.

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