Tyson Foods (TSN) was reeling on Monday, with shares finishing off roughly 10% after reporting lower-than-expected earnings and cutting full-year guidance. However, as the price of TSN stock falls through the floor, have new investors been given a tasty entry point?
Let’s take a look at what Tyson Foods reported, then dive into whether or not you should be buying or selling shares of TSN stock.
Tyson Foods Earnings
Revenue for the quarter came in at $10.1 billion, just less than analysts’ expectations for $10.3 billion. On a year-over-year basis, however, sales grew 4.3%. Adjusted net income per share came in at 80 cents, but Wall Street was looking for 92 cents per share. Again, though, that was better than the 75 cents per share TSN reported for the third quarter of 2014.
Tyson experienced strong performance from its chicken and prepared foods segments as both volume and operating income rose in the two divisions.
In particular, chicken volumes were up 2.9% and operating income jumped from $195 million during the third quarter in 2014 to $313 million. Prepared foods experienced a volume increase of 77.4% and operating income grew from a $50 million loss to a $207 million gain. The prepared foods business improvements should be taken with a grain of salt, however, as Tyson’s acquisition of Hillshire Brands were represented in this quarter’s results, which benefited the year-over-year comparisons.
Looking forward, TSN management lowered fiscal 2015 adjusted earnings guidance from a previous range of $3.30 to $3.40 per share, down to $3.10 to $3.20. The reason for the reduction is weakness in Tyson’s beef segment, which posted an operating loss of $7 million for the quarter as costs rose and volumes fell 3.9%.
Chicken Is the New Beef
Tyson Foods operates a business with tremendous lasting power, which consistently increases proportionate to the global population. What TSN sells isn’t something that we as a society can forgo so easily — that would be protein, a key ingredient to all human life. Second, as we saw with this most recent quarter, when demand for one protein source falls (beef), demand for another protein source rises (chicken).
Tyson’s diversity in the industry is a strength that will continue moving its business forward.
Speaking of diversified business, the Hillshire Brands acquisition is already helping Tyson Foods’ bottom line and looks to continue that trend moving forward. The prepared foods business is no longer just about quick and easy, it’s quick and easy quality food, which is what Hillshire Brands brings to the table.
We see this every day as McDonald’s (MCD) and other once-dominant fast-food entities struggle to improve their unhealthy image while the Chipotles (CMG) of the world thrive from the perceived quality of their menu items.
Lastly, despite lowering full-year guidance for 2015, Tyson Foods management team believes 2016 will be a good year and that the company can post at least 10% annual earnings per share growth over time.
While that sort of growth wouldn’t be good for a highflying technology company, in a boring industry like food, that is a healthy increase — especially for a company trading at just more than 10 times analysts’ expected earnings for 2016, and less than 13 times the high end of Tyson’s expected 2015 earnings.
From both a valuation and business standpoint, paying 10 to 13 times earnings for 10% growth in a business with reliably high demand is difficult to find.
That looks like a win-win situation for anyone buying shares of TSN stock going forward.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.
