The Exchange

Tyson Stock Burned as Outlook Lowered Amid Drought Conditions

The Exchange

Tyson Foods (TSN), the largest U.S. producer of poultry and meat, got burned during Monday's trading session after delivering a lowered outlook amid continuing drought conditions across the Midwest.  At the close, the stock had shed 7.99%; it traded in a range of $14.07 to $15.46 on heavy volume throughout the day.  The meat-producing king was thus crowned Monday's second-worst-performing food stock (grocery giant Supervalue (SVU) saw the largest decline in the edibles universe).

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The company's fiscal 3Q earnings failed to meet analyst expectations at $76 million (or 21 cents a share), down from $196 million a year ago, and revenue of $8.31 billion, up from $8.25 billion a year ago. Analyst consensus had seen earnings at 54 cents a share on revenue of $8.72 billion. Tyson slashed its full-year revenue forecast by a billion, to $33 billion, and forecast its 2013 revenue to be $35 billion.

The worst drought seen in 56 years has led to a 50 percent jump in the price of corn at the Chicago Board of Trade over the past two months; since field corn is a major ingredient in livestock feed, this price surge is expected to eventually hit consumers' grocery bills as they shop for meat, poultry and dairy items.

Before Consumers Feel the Pinch

Before consumers feel a drought pinch, the rise in feed prices are felt by food-producing companies such as Tyson, which said in its earnings call that it plans to slash capital expenditures over the next year in order to have the cash to purchase the much higher-priced livestock feed. The hope for the company is that it will be able to eventually pass on these higher costs to consumers without a further hit to domestic beef demand, which -- as consumers are spending less -- has already been dented in recent months (and wasn't helped by the "pink slime" controversy of last spring). But the trend of higher costs and prices could eat at future profits; hence, the lowered outlook.

As COO James V. Lochner said on the earnings call, "The drought definitely will have a long-term impact in the overall beef supply...and obviously it's starting to make cattle come to the feed lines earlier. But more importantly this year, what it's doing, as well as the price of corn going up, it caused a radical correction to the feeder cattle pricing."

Still, the company said it expects to remain profitable, albeit less so than previously thought, throughout the remainder of the year and into 2013;  its beef and pork segments are facing the most significant challenges, according to CEO Donnie Smith. Some analysts saw something to cheer about in Tyson's chicken forecast; the company said they had no plans to further cut their poultry production and that it should be their most profitable segment in the next year. Since their chicken business produces the bulk of Tyson's operating income, this could be read as a major upside to a fairly disappointing report. But investors chose to sell anyhow.

Year to date, Tyson is down around 30%. Its 52-week range is between $14.62 and $21.06.

Corn prices Monday are at $8.05 per bushel; the record high during the past two drought-ravaged months was $8.28. Rain has sprinkled some parts of the Midwest recently -- as forecast two weeks ago -- but it's likely too late to have a positive effect on this year's corn crop. Soybeans, on the other hand, could still benefit from the moisture, as they are in a different growth phase than corn. Later this week we'll get a USDA supply-demand report that should give a clearer look at the drought damage wrought by this drought.

Last month the USDA forecast a food-price rise of 3% to 4% across the board in 2013.

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