Why Is Tyson (TSN) Up 9.7% Since Last Earnings Report?

A month has gone by since the last earnings report for Tyson Foods (TSN). Shares have added about 9.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Tyson due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Tyson Foods Q2 Earnings Lag, View Reflects Coronavirus Woes

Tyson Foods posted dismal second-quarter fiscal 2020 results. Adjusted earnings for the reported quarter were 77 cents per share, missing the Zacks Consensus Estimate of $1.21. Additionally, the bottom line declined 36% year over year. Net sales advanced 4.3% to $10,888 million. However, the top line fell short of the Zacks Consensus Estimate of $11,641 million.

Gross profit for the fiscal second quarter came in at $1,021 million, down 14.3% from the prior-year quarter. Gross margin contracted 200 basis points (bps) to 9.4%. Tyson Foods’ adjusted operating income decreased 23.4% to $501 million. Also, adjusted operating margin for the period was 4.6%, down 150 bps year over year.

Segment Details

Beef: Sales in the segment dropped 2.4% to $3,979 million. Sales volume rose 2.7% year over year owing to robust demand for beef products. Average sales price remained flat.

Pork: Sales in the segment grew 8% year over year to $1,266 million. Sales volume increased 2% year over year, owing to higher domestic availability of hogs and solid demand for pork products, especially in the consumer products and export sales networks. Average sales price rose due to higher livestock costs as well as stronger export markets.

Chicken: Sales in the segment dipped 0.3% to $3,397 million on account of reduced volumes from the rendering and blending business. Sales volume declined 1.5%. Average sales price in the quarter rose owing to reduced rendering and blending sales, partly offset by weak chicken prices due to tough market conditions.

Prepared Foods: Sales in the segment rose 2.6% to $2,080 million. Prepared Foods’ sales volume remained flat as volume growth in the consumer products business was countered by softness in the foodservice channel and other intersegment sales channel shifts. Average sales price increased on account of favorable product mix and higher raw-material costs.

International/Other: Sales in the segment were $465 million, down from $277 million reported in the prior-year quarter. Sales volume improved remarkably, whereas average sales price tumbled.

The company exited the quarter with cash and cash equivalents of $437 million, long-term debt of $10,978 million and total shareholders’ equity (including noncontrolling interests) of $14,594 million. In the first six months of fiscal 2020, cash provided by operating activities was $1,260 million. Management projects capital expenditure to be approximately $1.2 billion for fiscal 2020.

Guidance

For fiscal 2020, USDA still expects overall domestic protein production (chicken, beef, pork and turkey) to rise 3-4% year over year. A large portion of the upside is likely to be absorbed by export markets. However, the company expects certain disruptions from coronavirus. Management expects food and protein demand to shift among different sales networks and witness short-term hiccups amid the pandemic. Nonetheless, worldwide demand is expected to increase over time.

The company is battling several hurdles related to the pandemic, which are expected to elevate the company’s operating cost burden and weigh on its volumes in the remainder of fiscal 2020. Tyson Foods expects to continue facing a slowdown and temporary idleness at its production facilities due to member shortages. Moreover, though every segment is seeing a demand shift from foodservice to retail, retail volume increases have not been enough to compensate for soft foodservice volumes. Management expects volumes to decline in the second half of fiscal 2020.

While the company is unable to forecast the impacts of COVID-19 on its short and long-term demand, management said that it is well placed in terms of liquidity to run its business and meet obligations. In fiscal 2020, it expects total liquidity to stay above its minimum target of $1 billion. Moving on, management anticipates industry-fed cattle supplies in the beef unit to rise roughly 2% in fiscal 2020 compared with 1% growth projected earlier. For pork, the company envisions increased industry hog supplies to the tune of nearly 5% year over year compared with the prior view of 4% growth. Also, livestock costs are projected to decline in the remainder of fiscal 2020 with more available export markets.

Additionally, chicken production is now estimated to rise 3-4% in fiscal 2020, per USDA. Earlier, it was anticipated to rise 4%. For the remainder of fiscal 2020, management doesn’t expect pricing to improve. Also, it doesn’t expect elevated consumer products demand to completely make up for the expected declines in foodservice. The company anticipates disruptions from coronavirus to impact raw material availability in the Prepared Foods segment. Overall raw-material costs are anticipated to fall in the remainder of fiscal 2020 from the same period in fiscal 2019. Management expects higher retail sales to dent foodservice demand in the remaining part of fiscal 2020.  Moreover, its international segment is anticipated to be troubled in the back half of the fiscal due to coronavirus-related market hurdles.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -26.86% due to these changes.

VGM Scores

At this time, Tyson has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It’s no surprise Tyson has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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