Market Overview

Tyson's Profitability is Vanishing

Tyson Foods (NYSE: TSN) reported higher-than-expected earnings, with an EPS of 42 cents on revenues of $8.33 billion, which was also ahead of estimates by $3 million.

While Tyson's president praised results despite higher costs, the company may be challenged by lower sales volumes in the future. Sales volumes as a whole fell 5.3%, but higher prices of 11.3% on average helped the company's margin. The help wasn't enough, however, as the firm's operating income dropped $149 million and the company's margin fell by nearly a half, to 3.3%.

Across the board, margins fell with the exception of prepared foods, which jumped from 3.5% to 5.9%. Margins on chicken plummeted the most, to 1.2%, but beef products are barely turning a profit, at 0.9% margins. This is particularly concerning for the company, as its combined chicken and beef income was just $36 million for Q1 2012, compared to $297 million for the same period last year.

The company is dependent on fresh meats, which are 43.2% of the company's distribution channels. The second-largest group, food service, is just 19.1%. This means that it is dependent on low commodity costs and consumer demand for meat. The company is being challenged on both fronts. Firstly, commodities have stayed high, particularly corn, which literally fuels Tyson's product line. Secondly, Americans are eating less meat. If both trends continue, the company will need to raise prices even more to avoid a loss.

At the same time, unpopular U.S. farm subsidies, which have been cut and are perpetually eyed by left and right-leaning politicians alike, are facing cuts, which may raise prices across the board for food suppliers. On the other hand, some opponents of the subsidies believe that a cut in corn-based ethanol subsidies will raise the production of cornfeed production, which will in turn boost the margins for companies like Tyson.

A market-wide rally helped the company jump by nearly 6% in early day trading, but those gains may not last long if investors look at the company's balance sheet. Likewise, future downscaling will likely hit the company in the coming year, as the company expects to decrease industry production by around 4% from last year's operations. The company is hoping that lowered feed costs will improve the company's margins for beef products, but with resurgent economy may drive up commodity prices, rendering the promise of lower costs empty.

Posted-In: Earnings News Trading Ideas Best of Benzinga

 

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