Tyson Foods (TSN) is a meat giant that faces challenges to profit growth, largely because of the commoditized nature of the meat business itself. Investors, analysts say, should closely consider its ability to add value and to attack new global growth markets.
Tyson makes and distributes raw and value-added chicken, beef, and pork. In chicken, the company has a No. 1 share in the U.S. market at 22 percent, according to Morningstar. In beef, Tyson is tied for the top spot with Cargill, also at 22 percent market share. And in pork, Tyson is second to Smithfield (SFD) with a 17 percent share.
On the chicken side, Tyson is vertically integrated, partaking in every segment of the production process, from breeding to the transportation of final goods. For beef and pork, Tyson contracts independent farmers to buy live hogs and cattle.
Despite the company’s impressive market penetration, its profitability is limited, through no fault of its own. Tyson faces so many competitors in raw meat that its pricing power is quite weak.
Tyson also is highly vulnerable to increases in commodity prices. Rising grain played a major role in curbing profits in the quarter ended Oct. 1. Grain and bean feed for animals represent the most expensive cost to raise chicken, pigs, and cattle. Corn prices soared to record peaks last summer and other crop prices jumped, too.
The company’s profit totaled $95 million in the Oct. 1 quarter, less than half the year-earlier total of $208 million. Revenue gained 13 percent to $8.4 billion.
Standard & Poor’s analyst Tom Graves has a hold rating on Tyson shares. “Over time, we think TSN, as a major diversified protein supplier, is positioned to benefit from improving economic conditions, including rising incomes, and changing diets in developing international markets,” he writes.
“We expect TSN's strategy to include a focus on expansion in value-added food products.”
Tyson next reports earnings Feb. 3.
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