Shares of Tyson Foods (TSN) sank by nearly 20% last week after the company reported its first quarterly loss in over a decade, observes Jason Clark, value investor and contributing editor to The Prudent Speculator.
The protein producer said it lost $0.04 per share in Q2 (when adjusted for $0.24 per share of restructuring costs) as market headwinds remain at play.
Management had warned last quarter that dwindling cattle supply had affected the beef market, driving company segment revenue 8% lower, primarily due to price concessions (5.4%) but also affecting volume (2.9%).
Generating double-digit profit margins in the three most recent years, Beef merely broke even this quarter. In Tyson’s second largest segment (Chicken), sales improved, mostly on higher volume but boneless breast meat, tenders and wings were down more than 50%.
Prepared foods and International were bright spots and remain growth opportunities for Tyson. But the two segments represent just a quarter of sales combined and typically account for a single-digit percentage of operating income. Moreover, management remarked that certain export markets have been closed off due to attempts to contain bird flu.
As one might expect, Tyson adjusted its fiscal 2023 revenue forecast lower to between $53 billion and $54 billion from the previous forecast of $55 billion to $57 billion, and for profit to break even.
We wrote in our last quarterly update that that we thought the company had encountered a perfect storm of bad news of late that is highly unlikely ever to be repeated. As evidenced by the latest quarterly results, the issues will take quite a bit longer to unwind.
This might particularly be the case within the Beef space as cattle gestation isn’t unlike that of a human (280 days), so the drop in inventory will take time to rebuild, especially as feed costs remain elevated. We do expect price actions in recent weeks to offset margin pressure in the quarters to come.
The recent share slide is undoubtedly painful for current owners, but taking a multi-year view, we think the valuation offers a compelling entry point for those considering ownership of the stock. This is despite the operational challenges that management has vaguely acknowledged also linger.
Indeed, the firm has experienced no shortage of negative press in the past weeks and years, a result of corporate officer misbehavior, the firm’s COVID protocols and additional safety concerns at certain factories.
Productivity improvements have apparently been underway, liquidity doesn’t appear problematic, and the Street’s EPS target a few years out is back over $5 per share. We’ve given a much-deserved trim for our Target Price to $80, but we are remaining patient with the position as the dividend yield is 3.9%.
