Investors of Tyson Foods got cold feet on Monday (Aug. 26) amid concerns of steep production increases that will most certainly pressure poultry margins in the coming quarters.
Shares of Tyson Foods tumbled more than 7% following a downgrade by Bank of America/Merrill Lynch analysts who took the stock from a “buy” to a “hold” recommendation on a one-year target price of $32.
The stock was trading Monday afternoon (Aug. 26) at $29.17, down $2.31 per share following the downgrade.
Tyson Foods had been flying high of late hoisted by better operating margins linked to lower commodity grain costs and higher chicken prices. But analysts heeded caution on Monday, following steep increases in poultry production reported across the industry.
The Merrill Lynch team of Ryan Oksenhendler and Bryan Spillane said recent industry data indicates a steep increase in production that will likely squeeze operating margins sooner than expected – by the spring of 2014.
U.S. Department of Agriculture recently reported broiler egg sets rose 3% from a year ago, but pullet placements among breeders jumped 8% in July. At the same time cold storage levels rose 4% from June, and processors had 5% more chicken in the freezer at the end of July than they did a year ago. These stats forecast excess poultry supplies in the coming two quarters or so, and also threaten to cut short the rally in wholesale prices enjoyed by processors for most of this year.
Georgia Dock chicken prices for boneless, skinless breast were $2.08 cents per pound last week, up from $1.77 a year ago. Leg quarters, typically an export item, were bringing 53 cents per pound last week, up one cent from a year ago.
While Tyson is a diversified meat company, chicken has been one of the brighter spots in its portfolio this year. Beef and pork margins have been constrained from demand issues relevant to supplies of live cattle and hogs. Tyson Foods continues to invest its chicken and prepared foods segments in part because it will help drive the company’s value-added sales, a mission CEO Donnie Smith announced late last year.
Smith said in the company’s recent earnings call that Tyson’s move toward growing value-added sales 6% to 8% this year is on track with 5% gains made through three quarters of 2013. Last year roughly 45% of Tyson Foods’ sales came from value-added products. That was $15 billion of the $33.3 billion the meat giant posted in total revenue, according to analysts with Fitch Rating Service.
Using that data, half of Tyson’s total sales are now perceived as valued-added. These products command a larger profit margin than commodity whole or chicken parts. They also provide some insulation against this perceived threat of declining industry margins.
Earlier this month, Tyson executives said they expected U.S. chicken production to increase 2% to 3% in fiscal 2014. Smith said Tyson’s chicken segment should be operating at or above its normalized range through next year.
Tyson was not the only company impacted from the Bank of America downgrade. Its chief competitor, Pilgrim’s Pride, also lost 7.75% of its share value on Monday. Shares of Pilgrim’s closed at $15.47, down $1.30 on the day.
Both companies recently reported strong results in chicken. Tyson’s chicken sales rose 10.6% over the past year to $3.16 billion, largely on the heels of higher demand. S&P Capital IQ analyst Tom Graves expects chicken to provide the largest amount of profit for Tyson this year and next, helped by a likely reduction in grain costs thanks to lower corn and soybean prices.
Pilgrim’s reported chicken sales of $2.18 billion in the recent quarter. Sales rose 10.5% from a year ago. Pilgrim’s CEO Bill Lovette, told investors on July 31 that he believed the “industry remains disciplined to the supply and demand fundamentals necessary for profitability.” He said the higher egg sets also met with lower hatchery rates compared to a year ago. Lovette said when looking at cumulative chick placements, the industry is still at one of its lowest levels since around 2007.
The one thing analysts and poultry executives do agree on is that cost-conscious consumers continue to purchase more chicken than beef, given the lower prices per pound.