Last quarter, the news at chicken, beef, and pork processor Tyson Foods (NYSE:TSN) was that the company was upping its full-year earnings guidance -- but to a level below analysts' expectations. The stock tanked 7%.
Today, the company reported full-year results that fell at the low end of that guidance -- although they were up 72% from last year (after taking out one-time events). Investors must have expected bad news -- although sales and earnings set all-time highs -- because the stock has fallen 8% since last quarter's guidance was issued. The stock is down 2% more today.
Tyson has been building a more solid base of profitability by increasing the amount of higher-margin value-added products it sells. This year, they were 38% of sales, and they are expected to rise to 40% in 2005. The company has also been paring the massive IBP acquisition debt. Debt, as a percentage of capital, is expected to drop from 48% in 2003 to 40% in 2005.
Still, the company is in a commodity business in which price gyrations create earnings havoc. That is clearly demonstrated by Tyson's very wide earnings guidance for 2005 of $1.15 to $1.45 a share. But, at the high end, the stock is trading for 11.5 times forward earnings -- a bargain level for a company with great brands and an improving balance sheet.
Don't overlook the volatility in the company's business segments. Operating margins for beef, the largest segment, fell from 5.8% in last year's fourth quarter to 1.3% this year. For chicken, the second-largest segment, they increased from 2.8% to 4.2%. While diversification can work in the company's favor, there is no guarantee that all cannot move in unison -- up or down.
On a price-to-earnings (P/E) basis, Tyson is trading below some of its peers. Smithfield Foods (NYSE:SFD) -- and even Spam's provider, Hormel Foods (NYSE:HRL) -- are riding high on stronger pork prices. No. 2 chicken producer Pilgrim's Pride (NYSE:PPC) is clucking about higher chicken prices -- and the timely buy of ConAgra's (NYSE:CAG) chicken operations.
Investors are paying higher P/Es for companies with stronger, yet cyclical, earnings. Tyson's less than beefy beef margins are weighing on the stock. Investors would be wise to look at the entire company, compare the value being offered, and add this budding value stock to their portfolio.
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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned but does love Tyson's foods (note the small "f").
