Last month, Tyson Foods (TSN -0.43%) reported a fiscal 2023 second-quarter loss of $0.28 per share, down from a year-ago profit of $2.28. Even after taking out one-time items -- so-called adjusted earnings -- the company still bled $0.04 of red ink per share. Investors were none too pleased, sending the share price down sharply in response.
So now what? Could this be an opportunity for contrarian investors? While the second quarter could end up being the nadir, investors shouldn't expect a quick business rebound. Here are four reasons why.
1. Everything all at once
Tyson's business is fairly well diversified. It produces beef (35% of Q2 sales), pork (11%), and chicken (34%), and branded meat products (18%). Foreign and "other" round things to 100%. While it isn't unusual for any particular business line to be facing headwinds, CEO Donnie King noted in Tyson's fiscal Q2 2023 earnings conference call: "I can't remember a time when our business faced the highly unusual situation that we're currently seeing, where all three of our core protein categories, beef, pork, and chicken, are experiencing market challenges at the same time."
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The only major division that was performing "well" was branded meat products, but even there volumes were down slightly year over year in the quarter. In other words, Tyson really had an ugly quarter.
Looking forward, the company lowered its full-year fiscal 2023 revenue guidance from a range of $55 billion to $57 billion to a range of $53 billion to $54 billion. While that reflects the weak first half to some degree, it also hints that management is less upbeat than it was just a quarter ago. Unless every business rebounds at once, which seems unlikely, investors should probably share in management's pessimism.
2. There's a lag
Management highlighted that prices of key chicken products were off by 50% year over year. Such price changes aren't reflected immediately, working through the earnings statement with a lag. So the poor Q2 showing in the chicken business was really a representation of weak first-quarter chicken pricing. Although, according to management, chicken pricing has started to recover, it did not say that pricing was back to prior levels.
So, the best that investors should probably hope for in Tyson's second largest business line is a slow recovery -- and, just as importantly, one that will be spread out over several quarters, given the lag inherent in the business. Chicken will probably continue to be a headwind for a while longer.
3. Feed remains expensive
The next big issue boils down to the same thing that you are seeing at the grocery store, namely inflation. For Tyson, that comes in various forms. To combat this trend, management is working on cost-cutting efforts, such as closing underperforming processing assets, but that will more likely increase costs in the near term than reduce them.
The bigger issue on the inflation front, however, is feed costs. In the chicken operations, for example, feed costs are a full 62% of the cost of raising a bird. In other words, higher feed costs are a huge deal. Again, however, this is unlikely to be a situation where the cost increase is reversed in a single quarter. So more cost headwinds are likely through the rest of the fiscal year.
4. Bad timing on growth spending
The food maker has a long history of investing for growth. It often puts money to work during downturns so it can come out the other side a stronger company (it just bought a sausage company, for example). CFO John Tyson summed things up pretty well during the conference call when he noted that "...the timing on some of the capital expenditures, for example, kind of puts a pressure on the operating cash flows."
The read-through on this statement is that the company is putting money to work in an effort to grow the business, which is good, but that the spending will make financial results look bad for a bit longer. Sometimes that's just the way things go, but investors should heed management's warning here.
This too shall pass
Investors should probably expect Tyson to post weak earnings results for at least the rest of fiscal 2023. That said, the company has worked through industry downturns before and is highly likely to do so again without too much difficulty. But to expect a quick reversal of fortune, given all of the headwinds today, just isn't a reasonable expectation.
