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Challenges in Q4 Compel Tyson Foods to Lower Earnings View

Zacks Equity Research

Tyson Foods, Inc.’s TSN ongoing fourth-quarter fiscal 2019 is turning out to be worrisome, thanks to a few challenges triggered by adverse business conditions. This led management to lower earnings guidance for the fiscal. Investors’ sentiments were dented post the news, which was evident from the stock’s decline of nearly 5.8% in yesterday’s trading session.

Q4 Seems to be a Tough Trail

Tyson Foods has highlighted challenges such as reversal of a gain on mark to market grain derivatives, adverse impacts of a fire breakout in a beef processing plant and implementation of certain food-safety initiatives. Slower-than-expected operational improvements in the chicken unit are also a concern. This might impede growth witnessed in the chicken category for a while. Moreover, management has expressed concerns over commodity market volatility.

Thanks to these adversities in the ongoing fourth quarter, management lowered its fiscal 2019 earnings view. It now expects the bottom line in the range of $5.30-$5.70 per share compared with the earlier expectation of $5.75-$6.10. Markedly, the company delivered earnings of $6.16 in fiscal 2018.

Coming back to the headwinds, hurdles in the commodity market are likely to lead to increased input costs, as witnessed in the third quarter. In the said quarter, higher fed cattle as well as operating and labor costs exerted pressure on the beef unit. Also, higher hog costs in the pork unit and raw material costs in the prepared foods unit were headwinds. Markedly, the African Swine Fever had an adverse impact upon costs in the pork unit in the third quarter.

Strong Brands & Growth Efforts Bode Well

We expect that the company’s robust portfolio of protein-packed brands will provide some respite, amid the ongoing unpleasantries. In fact, the company expects demand for protein to rise consistently and is well positioned to gain from all opportunities in the space.

Moreover, acquisitions have played an important role in boosting the business, especially in the chicken unit. The company expects to keep gaining from the integration of Keystone and the newly-acquired Thai and European assets. Recently, the company entered into an agreement to invest in the foods segment of Brazil’s Grupo Vibra (“Vibra Foods”). The move is likely to bolster Tyson Foods’ access to Brazilian poultry supplies.

Further, management expects back-to-school season volumes to be sturdy along with continued growth in case-ready beef and pork businesses. Apart from these, the company’s Financial Fitness Program is on track, which is expected to continue augmenting efficiency as well as aid cost optimization. Such efforts to drive growth have helped this Zacks Rank #3 (Hold) stock to rally nearly 49.3% in the past year compared with the industry’s growth of 29.7%.


 

Going ahead, management expects favorable market conditions in fiscal 2020. This along with prudent moves to bolster portfolio and other growth endeavors keeps management confident about achieving preset targets for fiscal 2020.

Check These Solid Food Stocks

General Mills, Inc GIS currently has long-term earnings per share (EPS) growth rate of 7% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hershey HSY presently has a Zacks Rank #2 and long-term EPS growth rate of 8%.

Conagra Brands CAG currently has a long-term EPS growth rate of 7% and a Zacks Rank of 2.

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