Why Tyson Foods Is a Good Pick
Dec 12th 2013 5:51PM
Updated Dec 12th 2013 5:54PM
With the acquisition of Smithfield Foods by a Chinese meat producer, Shuanghui International, Tyson Foods' , a meat protein company, pork business has become quite advantageous. This is mainly because Smithfield was the leading pork processor in the United States and it had the most market share at 28%. Tyson Foods' market share stands at 17%.
The benefits of Smithfield's acquisition was reflected in Tyson's recent quarterly results. Tyson Foods delivered great numbers in its fourth quarter which beat the Street's expectations as more customers turned to the company for their meat requirements amid rising competition from Hormel Foods and Pilgrim's Pride
Tyson's recent earnings
Driven by greater volumes and higher prices for chicken and beef products, Tyson Foods' revenue grew to $8.89 billion for 7% growth over last year's quarter. Earnings also moved north by 27% to $0.70 per share. The company has been making many efforts, such as introducing new products, acquiring new businesses, to boost its sales , which led to 2.4% growth in chicken products and 4% growth in beef products. Demand for chicken has been on the rise, mainly because chicken is cheaper than beef and pork.
Moreover, the meat provider expanded its business in China and it launched new products which improved its sales in the prepared foods business. Tyson also acquired two new food businesses, Don Julio Foods and Circle Foods, in February and June this year, respectively. These two acquisitions helped the food retailer strengthen its prepared food segment, which grew 5.2% during the quarter.
Although the company witnessed higher demand for its products, the increase in input prices was a matter of concern. However, Tyson managed its costs efficiently by taking cost-control measures. Although the increase in grain feed costs was transferred to customers as higher prices, volumes for chicken still increased. Moreover, gross margin also expanded by 40 basis points over last year.
Tyson also stopped using Zilmax, a drug which is used by meat processors to increase a cow's weight before it is slaughtered. This is mainly because many countries such as China and Russia banned imports of this meat, which resulted in a loss of sales for Tyson as well as other food companies such as Hormel Foods. The meat processor decided to stop using Zilmax because of the effect on its exports.
How does Tyson stack up against Hormel and Pilgrim's Pride?
Tyson's performance has been quite impressive versus peer Hormel in terms of stock price performance. However, Pilgrim's Pride, a chicken producer, led the pack with the highest gain in stock price as shown in the chart below:
Pilgrim Pride's share price appreciation of 122.5% came mainly because of its remarkable cost-management measures. Its earnings in the last reported quarter surged to $0.62 per share, 265% more than last year's quarter. Increasing its chicken prices and keeping its costs in check enabled the company to double its margin. Pilgrim Pride's gross margin jumped to 11% in its third quarter from 5.1% last year. Although Tyson too expanded its gross margin, the increase was comparatively small. Tyson's gross margin for the quarter expanded to 7.5% from 7.1% last year. Although Tyson's cost control measures were fruitful in the chicken segment, the company witnessed shrinking margins in the prepared foods segment. On the other hand, Pilgrim's Pride does not offer prepared foods. Hence, Pilgrim's Pride provides tough competition to Tyson Foods mainly in the chicken products segment.
Hormel, on the other hand, underperformed the others with a 48.1% increase in stock price over the last year. Nonetheless, Hormel Foods has been trying out ways to attract consumers. For example, it launched a ready to eat wrap called Rev to appeal to teenagers. The new product will come in eight varieties and it will be marketed well. Hormel is also focusing on its marketing efforts for new products such as Rev and Mexican sauces to make them more accessible to its customers.
Moreover, Hormel Foods' recent quarter also delighted its investors with a 7% jump in its top line, clocking $2.3 billion in revenue. The company has also been able to manage its costs well as reflected by an earnings jump of 18% and expansion of gross margin by 40 basis points over last year's quarter. It will be interesting to see how things shape up among the three players with each one trying to outperform the others.
Bright future ahead
Coming back to Tyson, the company has performed well by strengthening its segments and controlling its costs. Moreover, it provided a good outlook wherein it expects its sales of chicken to grow and it expects its international food business in China will do well. Tyson's prepared foods business will also grow, especially because of the two acquisitions made during the year. The acquisitions will start yielding benefits in the coming months.
The meat processor will increase its domestic protein production by 1% in 2014. Hence, the company will grow further in the coming months. Moreover, Tyson Foods increased its quarterly dividend which made investors even more delighted.
Hence, Tyson Foods looks increasingly attractive. With a growing chicken and processed foods segment, great cost control methods, and a bright outlook this company is ready for an upside. Investors should definitely take note of this food company.
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The article Why Tyson Foods Is a Good Pick originally appeared on Fool.com.Pratik Thacker has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.