In some regards, one almost has to feel a bit of sympathy for struggling meat producer Tyson Foods (TSN -0.98%). First, the pandemic created obvious logistical headaches. Now, post-pandemic inflation and economic wobbliness are proving problematic.
As management bluntly admitted in its disappointing fiscal second-quarter report last Thursday, "The current protein market is challenging."
Last quarter's top challenge? Beef, pork, and chicken prices are simply too low -- or maybe costs are too high. Or, perhaps it's both. Whichever it is, Tyson's $12.6 billion cost of sales in the latest quarter chewed up nearly all of its $13.1 billion in revenue and pushed the food giant out of the black and into the red for the period.
There's more to the story that raises questions regarding Tyson's pricing and its costs, however. Let's dive in.
Costs too high, prices too low
Tyson Foods turned $13.1 billion worth of sales into a loss of $0.28 per share (or a loss of $0.04, after adjustments) for the quarter that ended in early April. The top line was essentially even with the prior-year period, but the bottom line saw a big swing from the earlier period's profit of $2.34 per share. Analysts were collectively calling for earnings of $0.80 on revenue of $13.6 billion.
Data source: Thomson Reuters. Chart by author.
The key culprit behind the poor results was the 11% increase in input costs versus flat year-over-year revenue. Namely, Tyson's cost of goods sold grew from an affordable $11.4 billion a year ago to $12.6 billion this time around. That's nearly the entirety of last quarter's top line.
And there's the rub. The charts below put things in perspective, showing the cost and retail pricing trends for the company's three core profit centers. The company should have done better.
Take pork, for instance. Although the price for underlying lean hogs has peeled back from the peak it hit in the middle of last year, Tyson wasn't able to capitalize on the widening divergence between price and cost.
Data source: Investing.com and Bureau of Labor Statistics. Chart by author.
And that's just pork chops. Other pork products like bacon and ham also saw their retail prices hold near last year's elevated levels during Tyson's recently completed quarter against falling input costs.
Beef is seeing a similar (though not identical) dynamic. That is, beef cattle are still fairly expensive, and prices continue to inch higher. But steak and hamburger prices remain firm as well.
Data source: Investing.com and Bureau of Labor Statistics. Chart by author.
Tyson's fiscal Q2 beef costs essentially matched beef sales. That gross-profit breakeven is a far cry from beef's gross profit of $638 million in the year-ago quarter as well as from fiscal Q1's gross profit on beef of $956 million.
Chicken is a slightly different story in that Tyson is more directly involved in much of its chicken production. The same basic gist still applies, though. Its chicken arm suffered a $258 million operating loss last quarter, reversing a $198 million profit in its fiscal 2022 second quarter, despite reasonably resilient chicken prices and reasonably well-contained chicken costs.
Data source: IndexMundi and Federal Reserve Bank of St. Louis. Chart by author.
The company isn't expecting these pricing and cost problems to meaningfully abate in the immediate future either. Its previous fiscal 2023 sales forecast of between $55 billion and $57 billion has been dialed back to a range of $53 billion to $54 billion. Slightly positive profit margin growth projections for beef, chicken, and pork were all trimmed to nil.
Hold off for now, but don't dismiss Tyson forever
In its defense, Tyson is incurring costs related to restructuring, facility closures, fires, and higher wages. Also bear in mind that the cost and pricing mismatch that Tyson is suffering is a regularly recurring dynamic in the meat business. It will eventually end with supply, demand, and prices all stabilizing at sustainable levels.
In the meantime, it appears that Tyson is either not charging enough for its products, paying too much for supply, or both. The trimmed-down guidance for the remainder of this year suggests the company itself doesn't see much relief on the immediate horizon either.
Bottom line? Both current and would-be investors may want to steer clear of the stock until there's better clarity on the cost/pricing front. Just don't take it off your watch list.
Although it could take a bit of time for the meat giant to find the right balance between cost and pricing, this stock is too cheap to dismiss indefinitely. It's trading at less than 10 times next fiscal year's projected earnings, and the stock's current price near $49 is more than 25% below analysts' consensus target of $61.70.
Clearly, the analysts following Tyson have hope. Perhaps they realize this cyclical headwind will eventually end -- as all the similar ones have before.
