By all accounts, Tyson (NYSE:TSN) scratched out an excellent third quarter. Sales, up 4.8%, overcame a 3.6% decrease in unit volume with a strong 8.8% increase in average price. Earnings per share were up 100% -- something to crow about.
Surprisingly, an increase in guidance for full-year GAAP earnings to $1.38 to $1.48 a share (up from $1.05 to $1.25) probably accounted for the 7% decline in yesterday's stock price. Analysts must have been cackling because they were expecting $1.44 for the fiscal year -- considerably higher than the low end of company guidance.
Tyson is a diversified "protein provider." A 5.5% fall in beef sales was more than offset by a 31.2% increase in pork sales. Chicken sales, riding strong pricing, were up 12.9% for the quarter. While diversification helped keep sales rising, all three business segments saw an increase in operating income -- an indication everything is A-OK. Or is it?
While Tyson is not plagued by the chicken abuse charges being leveled at industry No. 2 Pilgrim's Pride (NYSE:PPC), avian flu in the U.S. has closed some export markets. Mad cow disease has done the same to beef and sent international beef sales down 43.5%. Although no Tyson chickens or steers have tested positive for these diseases, the company has had to "deal with it" -- and the results have been less than disappointing.
Commodity prices are also making life tough. Tyson offset $44 million in grain price increases by hedging. While that is good, hedging cannot guarantee that future results will receive similar benefits.
There is much to like about Tyson other than its diversification. The company is well on its way to reducing its debt-to-capital ratio to 43% this year. What keeps the price-earnings ratio under the market is a 4.9% operating margin. Although that beats the 4.0% at Smithfield Foods (NYSE:SFD) it is far from the plump 17.2% at former Motley Fool Stock Advisor recommendation Sanderson Farms (NASDAQ:SAFM).
Tyson is trading at 15 to 16 times the company's upper earnings guidance. There is long-term value here because margins are rising, debt is falling, export markets are possibly ready to reopen, and the company is focused on higher profit product introductions.
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Fool contributor W.D. Crotty does not own any of the stocks mentioned.
