Seemed smart...well, at the time anyway. Nice market share in a growing market. The stock was cheap. Decent enough dividend. Steady margin. Balance sheet that showed enough debt to be honest, but also a current ratio that I could be comfortable with. What now? For starters, that dividend yield is going to be more attractive. That would be wonderful. I mean, if Tyson Foods (TSN) has increased the dividend. They just did that in late 2019. I would not expect another bump up in that department.
What I did not see coming when I first entered into the stock was a global pandemic that would then through the infection of those who work for meat processors and meat packers that would close plants, impacting production, and impacting margin. What I never expected in a million years was a warning from the firm regarding supply chains, and an executive order from the desk of POTUS keeping these plants running through the Covid-19 crisis by authorization of the DFA. The shares traded higher after entry. Then they sold off hard with the broader markets only to rally with broader markets. Monday morning, in response to the firm's fiscal second quarter results, these shares will trade at or close to my net basis. Add? Hmm. Not excited. Take my football and go home? That is an idea rattling around in the back of my cranium. Let's discuss and come up with a plan. I mean, if you're game. If not, you probably care about what the firm has to say, as a consumer, if not for any other reason.
The Quarter
For the quarter ended March 28th, Tyson Foods reported adjusted EPS of $0.77, badly missing Wall Street expectations. Want to feel better? Playing by GAAP rules, the firm only missed by a dime. Revenue did grow 4.3% year over year to $10.89 billion, but still missed industry view by roughly $120 million.
Breaking the quarter down by segments, beef sales increased 2.7% to $3.979 billion while experiencing a slight contraction in average price. Chicken, which is the firm's second best seller, saw sales decrease 1.5% to $3.397 billion, where the average price increased 1.2%. There are two other large units, prepared food (Jimmy Dean, Hillshire Farm, Ball Park Franks, etc.), and pork. Prepared foods saw a very slight contraction in volume to $2.08 billion, but also a rise on average price of 2.7%. Pork sales ran 2% to $1.266 billion on an astounding increase in average price of 6%. Operating incomes decreased at each and every one of these "important" business lines, as operating margin declined across the entire firm from 6.1% to just 4.6%.
The firm goes on to explain that increased sales volumes on the retail side have not offset losses in food services. The firm also explains that reduced productivity coupled with increased related expenses will likely persist in the short-term (current quarter), and until the negative effects of the public health crisis is diminished.
Looking Ahead
Tyson anticipates industry fed cattle supplies to increase a rough 2% in 2020. The firm expects "ample supplies" in regions where the firm operates plants and for profitability in this unit to remain strong. As for pork, the firm expects hog supplies increase around 5% for the fiscal year, and for decreases in livestock associated costs moving out over the remainder (next six months) of that year. Chicken? Hmm, maybe a problem. Tyson projects chicken production will fall over the remainder of the year, below original USDA expectations for 2020. Not does the firm expect pricing to improve.
On the current situation, CEO Noel White explains, "During the quarter, we witnessed an unprecedented shift in demand from food service to retail, temporary plant closures, reduced team member attendance, and supply chain volatility as a result of the virus." White adds "While we cannot anticipate how long the challenges presented by Covid-19 will persist, we remain focused on driving long-term growth.... our solid balance sheet, ample liquidity, scale, and diversity continue to give us confidence in out long-term outlook."
Sounds right. I guess. Then again, wasn't it just about a week ago that workers were falling ill at too high of a rate and that condition forced these plant closures, an ad in high-profile newspapers, and a reaction by the president? Certainly, the president's action is a positive for the meat packers, and a positive for grocery shoppers, who is basically everyone. Clearly not everyone though. We do have to worry about the individuals who work on those lines as these plants work their way through this crisis. Making those jobs safer than they were will almost certainly impact productivity. Certainly makes me doubt my long position in the name.
My Plan
The shares have hit resistance at what is nearly the $65 level three times since bottoming out in March. I would love a second crack at getting out at the 50 day SMA, but let's be honest... that ship has probably sailed.
My plan is this. Fortunately, the position never grew beyond 40% of it's originally intended size. I am going to call the $53.25 level (61.8% retracement of the March through April rebound). That cracks, and I sold "Sold to you." That level remains out of bounds for now, and I work my way out of this name over the course of the week. I just don't feel good about the name, or the immediate future of these shares. I have plenty of places to put this capital, including Amazon (AMZN) , Microsoft (MSFT) , and Advanced Micro Devices (AMD) , just to mention three names that I remain enthusiastic about.
(Tyson Foods, Amazon and Microsoft are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL? Learn more now.)
