If you listen just to analysts or Bubblevision, you might get the idea that commodity businesses are boring and generic. After all, "it's a commodity business" is usually the analysts' way of summarily dismissing a company they don't like or don't know much about.
If commodity businesses are supposed to be boring and nondescript, somebody forgot to forward the memo to Tyson Foods (NYSE:TSN). Sharp movements in the costs of feed, live animals, and finished meat, coupled with a fading diet fad and chaos caused by mad-cow and avian flu fears, have made the meat business a bit more "interesting" of late.
Despite it all, Tyson did pretty well for its second quarter. True, sales were up only about 3%, operating income was down, and reported earnings per share declined to $0.21 from $0.33, but that was all better than the Street had been expecting. What's more, Tyson management topped it off by providing guidance that suggests the next two quarters will be OK as well.
The company's two largest businesses, chicken and beef, were both flattish for the quarter. Chicken revenue climbed about 1%, while beef revenue picked up by about 3%. Despite lower grain prices, Tyson saw operating margins in the chicken business decline. In the beef business, restrictions on Canadian beef, limited export opportunities, and some slackening in domestic demand all hurt results.
Tyson's pork business was stronger in the second quarter: Revenue grew about 13% and operating margin declined by half to 2.3%. Although pork pricing was good, high prices on live hogs hurt segment profitability.
Even though other Fool writers have written favorably on Tyson Foods in the recent past, there's no doubt that the company -- and its stock -- has been a bit more turbulent than have other meat companies, including Hormel Foods (NYSE:HRL), Smithfield Foods (NYSE:SFD), or Pilgrim's Pride (NYSE:PPC).
That said, there is certainly reason to believe that Tyson still has better days ahead. Barring another case of mad-cow disease, major export markets like Korea and Japan should reopen around year's end. What's more, the company continues to make progress with its packaged/prepared foods, and ongoing advertising continues to build awareness of the company's non-chicken products.
Progress aside, Tyson will have to do more before I get more interested in the stock. With business looking as though it may have bottomed, Tyson will need to improve its margins and return on capital metrics. Assuming management can improve the business and that there are no further shocks to the system (like another mad-cow scare), Tyson could again become an interesting stock for fattening up portfolios.
For more on the food biz:
- Pilgrim's Pride Clucks In
- McDonald's Merry March
- Investing in Controlling Obesity
- Tyson's Maddening Times
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
