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This Meat Producing Company Should Be Good for the Long Run

April 29, 2014 | About:
Vinay Singh

Vinay Singh

5 followers

Food companies have numerous problems to deal with, including rising input costs and lower demand for products such as chicken. However, meat companies seem to have some added worries that are hampering their performance. For example, bird-flu outbreaks have dented overall demand for chicken in China.

This was clearly reflected in meat provider Tyson Foods' (TSN) recent performance. Although overall lower demand for chicken made investors worried, Tyson Foods managed to beat analysts' expectations and post a strong quarter by strengthening other segments.

Solid Performance

Driven by growth across all segments, revenue surged 4.7% to approximately $8.8 billion versus last year. Earnings jumped 50% to $0.72 per share during the same period. One of the key drivers of top-line growth was the prepared foods segment, which posted a sales increase of 8%, as the company is making a number of moves in this market and demand for such products is rising.

The meat company recently launched a number of breakfast products, as consumers are shifting from regular cereals to other protein-filled healthy items, such as smoothies and yogurts. Tyson Day Starts, the new breakfast line, offers seven frozen breakfast options and targets consumers who look for convenient options.

On the other hand, cereal companies such as Kellogg (K) are having a tough time trying to sell traditional breakfast options, which no longer click with customers. In fact, Kellogg's recent quarter was a drag mainly because of lower cereal sales, which comprise 30% of its top line. However, Kellogg has launched new items, such as a breakfast drink, which will have the nutrients of cereal and satisfy health-conscious consumers.

Also, it has added new flavors to its Special K cereals, which might be helpful. However, it will be interesting to see how these new items fare in the coming months, as the market is flooded with various healthy options.

Overcoming Barriers

Tyson's sales from the beef segment surged 7% to $3.7 billion despite an increase of 3% in its average selling price. This is mainly because of growing demand for beef, which drove sales north.

The company has not only made significant efforts to attract more customers but has also overcome a number of problems, such as diminished pork supply, which is forcing pork prices to rise. Supply is affected mainly because of a virus, porcine epidemic diarrhea (PED), which led to the death of a large number of pigs. Nonetheless, the company managed to register growth of 4.5% in sales over the year-ago quarter.

Even peer Hormel Foods (HRL) declared that its results for fiscal 2014 could be affected because of an increase in hog costs due to the PED virus. However, Hormel Foods also plans to attract customers by adding new products to its portfolio. It recently announced plans to expand the peanut butter line. Through this expansion, Hormel plans to strengthen its position in the lunch segment, where products such as chips and spams have already become popular.

In addition to the introduction of Rev, a ready-to-eat wrap, the company plans to introduce a new line of bacon toppings at its existing plant. Hence, Tyson faces stiff competition from this company's strategic moves.

Prospects Going Forward

Tyson Foods' future looks bright. It is attempting to strengthen its prepared-foods segment. It has been updating and renovating its plants in order to attain operating efficiencies. Moreover, increasing product prices are helping the meat provider grow its top line.

Additionally, Tyson has been on an acquisition spree; it completed its third acquisition to strengthen the prepared-foods segment. It acquired Bosco's Pizza, which sells frozen pizzas and a variety of breadsticks, in January. This buyout will not only expand Tyson's prepared-foods segment but will also diversify its portfolio of offerings.

The meat producer enjoys lower costs since its facilities have cattle sources nearby, which lowers its cost of delivery. Hence, the chicken segment's operating margin rose to 6.5% from 3.8% last year.

Moreover, Tyson Foods plans to expand in China, which should help in growing its international operations. It plans to have its own farms in China in order eliminate food-safety issues. In fact, the company plans to own 90 chicken houses in the region, which will supply quality input to the processing plants.

Conclusion

Despite several difficulties, Tyson Foods is holding up well, which is evidenced by its impressive results. Its move to lure customers through new product offerings should help the company boost its revenue further. Moreover, it has been expanding its footprint, largely in China, which looks interesting. Along with its new acquisition to strengthen the prepared-food segment, it enjoys cost advantages, which make it even more attractive. Hence, investing in this meat company is a good idea.


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