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Tyson Foods Gains From Protein Packed Brands, Costs High

Zacks Equity Research

Tyson Foods, Inc. TSN, a renowned meat products manufacturing company, is attracting investors on the back of a robust portfolio of protein-packed brands. Moreover, efforts such as acquisitions and efficiency-building programs have been yielding. However, the company continues to witness challenges in the ongoing fourth quarter of fiscal 2019. Moreover, persistent weakness in the Prepared Foods segment is a worry. Let’s take a closer look.

Efforts to Boost Portfolio Bode Well

Tyson Foods boasts a rich portfolio of protein-packed brands that are growing rapidly across the globe. During the first, the second and the third quarter of fiscal 2019, the company delivered higher sales in the chicken and beef categories year over year. Moreover, during the third quarter, the Pork segment performed well. Solid performances across these categories boosted the top line in the said quarter.

We note that acquisitions have played an important role in boosting the company’s portfolio. 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.

Apart from this, the company is steadily expanding fresh meat offerings on consumers’ rising demand for food without added hormones or antibiotics. In this respect, Tyson Foods’ buyout of Tecumseh is quite noteworthy. The company is venturing into alternative sources for meat and protein products, evident from investments in Memphis Meats and New Wave Foods. Further, the company is on track with new plant-based and blended products launches under the Raised & Rooted brand.

Tyson Foods expects demand for protein to rise consistently. It is well positioned to benefit from all opportunities in the space. For fiscal 2020, USDA expects overall domestic protein production (chicken, beef, pork and turkey) to rise roughly 2% year over year. A similar rate of growth is expected for fiscal 2019 as predicted by the USDA earlier. Such upsides along with optimistic sales view for fiscal 2019 are encouraging and boosting investors’ optimism. The Zacks Rank #3 (Hold) company’s shares have gained almost 15% in the past three months compared with the industry’s rise of 10.1%.



Headwinds in Q4

The ongoing fourth-quarter fiscal 2019 is turning out to be worrisome, thanks to challenges triggered by adverse business conditions. Management 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. Management has expressed concerns over slower-than-expected operational improvements in the chicken unit and commodity market volatility.

Thanks to these adversities, 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 projection of $5.75-$6.10.

Coming back to the headwinds, commodity market volatilities are likely to lead to higher input costs, as witnessed in the third quarter for the beef, pork and prepared foods units. Moreover, lower sales in the prepared foods category, triggered by business divestitures, have been exerting pressure on Tyson Foods’ performance.

Wrapping Up

Despite these headwinds, we are encouraged about the company’s strong portfolio that includes well-known brands. Moreover, the company is on track with the Financial Fitness Program, which focuses on boosting operational efficiencies. Earlier, management stated that it expects the program to generate savings worth $400 million by 2019 and $600 million by 2020. All said, such upsides are likely to maintain Tyson Foods’ position in investors’ good books.

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