Aug. 6 wasn't exactly a red-letter day for Tyson Foods (NYSE: TSN ) or its shareholders. Not unexpectedly, Tyson's fiscal Q3 results took a hit from higher feed and grain prices because of the drought. As Tyson Foods CEO Donnie Smith put it, "We can't make it rain, but we can execute against our strategy." After dissecting the numbers, you can see that Tyson executed just fine in Q3. And if you're looking for bargains, a good thing just got a little better.
A recap of fiscal Q3
The headlines investors saw after the Aug. 6 earnings announcement focused on Tyson's "Cutting 2013 Forecasts" and "Missing Earnings." Both statements are true, but before you give up on the company let's take a closer look.
Earnings results topped the list of reasons Tyson shareholders dumped shares on Monday. The $0.21 a share vs. $0.51 in Q3 of 2011 certainly didn't look good on the surface. The difference? A $167 million one-time charge for retiring high-interest debt hit the bottom line to the tune of $0.29 a share. Looking ahead to what will be a difficult feed and grain environment (there's that drought again), it's clear that doing away with expensive debt and the subsequent freeing up of cash flow is a nice move by Tyson.
Tyson swapped $1 billion in 4.5% notes due in 10 years for the existing 10.5% debt coming due in 2014. If you've ever refinanced your home to a significantly lower rate, you know the kind of positive impact that kind of swap can have on monthly cash flow. It certainly will for Tyson Foods.
Once you account for the $167 million charge and the $0.29 a share added back in, earnings of $0.50 a share this year compared with the $0.51 last year is solid. Also lost in the dourness of the day were revenue numbers. The $8.3 billion in total sales for the quarter was an improvement versus fiscal Q3 of 2011, in spite of pressures from a couple of key areas.
Consumers are still cutting back on higher-end meat products, and that's hurting the more expensive beef industry in particular. As consumers look to cheaper cuts of meat, Tyson's margins are feeling the sting. When you add lower-margin sales to higher feed costs, maintaining flat earnings year over year is darn good.
All is not lost
The rebound following Monday's earnings announcement indicates what investors can expect going forward. Any good news regarding rain in the Midwest will bump Tyson and others in the industry. Consider this: On Aug. 6, it was announced that many of the drought-stricken states can expect to see normal amounts of rainfall in the next 10 days. Soybean, corn, and wheat futures dropped 3.3%, 2.3%, and 0.6% respectively, that same day.
Imagine when an unemployment rebound finally takes hold, or consumer confidence starts to gain some momentum. I certainly wouldn't suggest betting on rain as an investment strategy, but the immediate impact on Tyson share prices is positive.
Even before the sell-off, Tyson Foods was one of the best values in the industry, by several measures. Based on trailing P/E, and price-to-sales and price-to-book measures, Tyson's closest competitor Hormel Foods (NYSE: HRL ) , is considerably more expensive. Hormel's trading at nearly 16 times earnings, compared with Tyson's 12. And Hormel's price-to-sales and price-to-book values are two to five times that of Tyson.
At a quick glance, Smithfield Foods (NYSE: SFD ) looks like a better value than either Tyson or Hormel. Based on earnings, Smithfield is trading at a mere 8.3 P/E and lower price-to-book and price-to-sales ratios, too. Poor ROA and ROE haven't helped, and earnings have consistently declined quarter by quarter. And Smithfield's 58% debt-to-equity ratio is an area of concern.
Little more aggressive? Sanderson Farms (Nasdaq: SAFM ) is smaller at only $900 million in market cap, but it had a nice fiscal Q2, growing revenues by 24% and (finally) generating positive earnings. Sanderson's focus on relatively lower-priced poultry versus beef production will appeal to cost-conscious consumers as higher commodity prices continue to affect prices. The recently approved $0.17 quarterly dividend isn't bad, either. However, the lack of a diversified product line will hinder results long-term and add an additional layer of risk. Both are easily avoided with Tyson Foods.
If dividends are what you're after, Hormel's 2.14% looks awfully good compared with Tyson's "meager" 1.04%, and is better than Sanderson's 1.78% yield. All are better than Smithfield Foods, which doesn't offer shareholders any income. But it's the diversification and growth in share price Tyson Foods offers that separates it from the rest of the food industry crop.
Tyson Foods' management knows it's going to be a bumpy road ahead; the drought combined with a tough global economic environment has made sure of that. That's why Tyson took steps to free up cash flow and suspended its share-buyback initiative. To invest in the mid- to long-term return of America's farmers and consumers, Tyson Foods is it.
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