Can This Meat Producer Offer Investors Safety?

Tyson Foods (TSN -0.59%) is the largest meat producer in the world. Based on that fact alone, the company will always see demand. However, negative trends can still impact the share price. Investors knew this all too well in 2008/2009 when the stock dropped by greater than 50%.

On a relative basis, the stock held up better than its peers, but no investor wants to deal with such a steep loss. Tyson Foods faces negative industry trends once again, but it still might be capable of stock appreciation. 

Results and expectations
In the third quarter, Tyson's overall sales grew at a 5.7% clip year-over-year, mostly thanks to a 3.7% jump in average sale price and a 2.2% increase in sales volume

Due to increased raw-material costs and reduced supply, pricing power has been key for Tyson Foods. That said, volume has also been strong for chicken, beef (recent rebound), and prepared foods. Only pork saw a slight decline in volume, due to falling demand and fewer exports. The business looks to be in good health, and Tyson Foods is upbeat about the future.

In addition to price increases, Tyson Foods is also focused on operational improvements in order to improve margins. Cost reduction and labor management are expected to play big roles. On the growth side, Tyson Foods will continue to focus on domestic value-added chicken (seeing continuous strong demand), international chicken production, prepared-food sales, and innovative products.

Thanks to recent weather conditions, Tyson Foods expects the planting environment to improve. This will lead to increased grain supplies and lower costs. For fiscal year 2013 and fiscal year 2014, Tyson Foods anticipates approximately $34.5 billion and $36 billion in sales, respectively.

The chicken segment should continue to perform well thanks to steady demand. Reduced costs have aided the beef segment, and Tyson Foods intends to improve its operational execution in beef. Pork exports are also expected to improve. Increased costs for prepared foods should be offset by operational improvements and pricing.

While all of Tyson Foods' segments matter, chicken and beef are the most important. Both segments showed solid improvements in the third quarter. 

*Sales in millions (Source: 10-Q)

Overall, it's a net positive. However, that doesn't guarantee that Tyson Foods is the best investment option in its peer group.

Tyson Foods vs. peers
It's clearly evident that Tyson Foods is a well-run operation, but so is Pilgrim's Pride (PPC -0.44%). While Tyson Foods has a 22% share of the domestic meat market, Pilgrim's Pride isn't far behind with a 19% share.

Pilgrim's Pride is also optimistic about the near future, and it recently beat expectations. Fundamentally, these two stocks are also similar.

(Source: Zacks.com)

Both stocks trade at similar valuations. While Pilgrim's Pride turns more investor dollars into profits (ROE), Tyson Foods makes up for that by offering a dividend. One big difference between these two stocks is their historical performance. Tyson Foods has greatly outperformed Pilgrim's Pride over the past decade.

Tyson Foods data by YCharts

Tyson Foods also proved to be more resilient when the market crashed -- relatively speaking.

You might have noticed Smithfield Foods (NYSE: SFD) in the chart above. Smithfield Foods is waiting for regulatory and shareholder approval for its sale to Shuanghui, a privately owned meat-processing company. The deal is expected to close in the second quarter of next year, but there are concerns about Shuanghui's food practices.

Since the deal was announced, Smithfield Foods' stock hasn't gone anywhere. It's possible for the deal to fall through, so downside risk outweighs upside potential. Even if you were looking at Smithfield Foods on a fundamental basis, it trades at 27 times earnings (more expensive than peers), it sports a net margin of 1.4% (lower than peers), an ROE of 5.7% (once again, lower than peers), and it doesn't pay a dividend.

Conclusion
If you don't believe in paying attention to external economic events, then Tyson Foods is a clear winner. On the other hand, being that the stock is sensitive to broader market corrections, it can't be recommended at this time. A missed opportunity is always better than a loss, and you might have an opportunity to pick up Tyson Foods' shares at cheaper prices down the road.