Prepared by Stephanie, Analyst at BAD BEAT Investing
Tyson Foods (NYSE:TSN) stock has been under immense pressure but it appears that it’s biding time. Many producers/meatpackers have had to shut plants, sanitize, send employees on temporary furloughs, and more. With continued declines in restaurant demand, the company has had to rely on consumer demand. The results have been mixed somewhat, although pricing has been mixed overall as evidenced by the recently-reported earnings pain, and it’s likely Q4 will see some stabilization, but what is unclear is if there will be a massive resurgence of COVID-19 into the fall. As of now, cases are rising and this is a risk to further closures. This could impact commercial and residential demand. There are huge costs for sanitation being experienced. What we want to talk about in this article is revisiting segment performance so you can know what to look for when the next quarter is reported. Overall, we are mildly bullish on the stock right now. But we need you to be aware of segment performance.
The pork segment
The pork segment was long a winner for Tyson but it saw declines in the most recent quarter. The segment saw a decrease in sales of 6.6%. Sales fell due to a decrease in volume of 16.5%, largely driven by lower production throughput. This was slightly offset by a 0.5% increase in pricing. As such, revenues suffered here. That said, operating income increased due to COVID-19 disruptions, which increased the spread between preexisting contractual agreements and the cost of live hogs, partially offset by production inefficiencies and direct incremental expenses related to COVID-19.
The beef segment
Ah the good ole beef segment. Beef remains the largest contributor to the top line. However, this is the one commodity that still concerns us as too high a price can hurt demand. The price of beef really has been rising quite heavily for the last five years, and pricing really jumped here in Q3. In Q3 2020, the average sales price for Tyson’s beef products rose by 11.6%. Demand was lower, as volumes fell 23.8%. Ouch. This volume and pricing mix led to sales falling to $3.653 billion vs. $4.157 billion last year. So, what happened here?
Well, we have to say beef saw pressure. Sales volume decreased due to lower production throughput associated with the impact of COVID-19 and a reduction in live cattle harvest capacity as a result of a fire that caused the temporary closure of a production facility for the majority of the first quarter of fiscal 2020. Average sales price increased as beef demand remained strong amid supply disruptions related to the impact of COVID-19. Operating income increased primarily due to COVID-19 disruptions, which increased the spread between preexisting contractual agreements and the cost of fed cattle, partially offset by production inefficiencies and direct incremental expenses related to COVID-19.
The chicken segment
Let’s be clear. The chicken segment is usually volatile, thanks to the movement in poultry prices and feed costs. This segment was down slightly from a year ago. Tyson saw sales volume that was down 4.2%, while pricing was also down 2.4%, year-over-year. The company saw sales of $3.112 billion vs. $3.331 billion last year for chicken products. These sales were met with higher segment expenses and led to a decline in adjusted operating income, which fell to a loss of $120 million vs. income of $237 million last year, which was somewhat surprising.
Here’s the deal. Sales volume decreased due to lower production throughput associated with the impact of COVID-19 in the third quarter and lower food service demand, partially offset by increased volumes in consumer products. Average sales price decreased due to weaker chicken pricing as a result of general market conditions. Operating income decreased primarily from market conditions, unfavorable product mix, as well as production inefficiencies and direct incremental expenses related to COVID-19.
The prepared foods segment
This segment always is mixed. Sales were down marginally. They came in at $2.035 billion from $2.089 billion a year ago. Average sales prices were up, but volumes decreased. Sales prices jumped 3.4%, while volume fell 6.0%. Operating income narrowed to $145 million from $236 million as margins fell from 11.3% to 7.1%. Growth in volume across the consumer products channel was offset by a reduction in the food service channel and other intra-segment sales channel shifts. Average sales price increased due to favorable product mix and the pass-through of increased raw material costs.
It’s prudent to remind you that for beef the USDA projects domestic production will increase approximately 3% in fiscal 2021 compared to a COVID-19 impacted fiscal 2020. As for pork the USDA projects domestic production will increase approximately 1% in fiscal 2021 compared to a COVID-19 impacted fiscal 2020. Turning to chicken the USDA projects a relatively flat to slightly increased outlook for chicken production in fiscal 2021 compared to fiscal 2020. With the prepared foods segment we think you need to watch pricing. We expect volumes to do well but pricing always is a variable. At the end of the day what we know for certain here is that the ongoing impact of COVID-19 is tough to quantify, but all indications are that Q4 started strong. The consumer data remains positive. Economic data is not strong but improving. While there will be some short-term added operational costs to ensure sanitation of plants, worker safety, packaging safety, and more thanks to COVID-19, we expect this improve as the crisis subsides in 2021. Consider shares as they dip into the $50 range.
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Disclosure: I am/we are long TSN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.