Aug. 6 wasn't exactly a red-letter day for Tyson Foods
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
At a quick glance, Smithfield Foods
Little more aggressive? Sanderson Farms
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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Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.