Wall Street waves caution flag for Tyson Foods

Reeling commodity markets continue to beat down potential earnings and the share price of Tyson Foods Inc. The meat giant’s stock set a 52-week low this week and was downgraded by several major brokerage firms because of deteriorating operating margins linked to escalating grain costs amid the worst drought in nearly 70 years.

J.P. Morgan analyst Ken Goldman, referred to this market setback as “scary times in proteinville for children of the corn,” like Tyson Foods and other meat companies that have animals to feed.

Last week Goldman downgraded Tyson shares from overweight or a buy position, to a neutral/ hold position and slashed earnings estimates for fiscal 2012 by 10%.

Goldman predicts Tyson’s total operating income for fiscal 2012 to be $1.22 billion, 5% lower than fiscal 2011. He sees operating income in fiscal 2013 sliding 6.17% to $1.149 billion.

In a July 10  investor note Goldman writes, “It’s unfortunate for Tyson, because just as beef margins have recovered, chicken margins are about to head south thanks to feed.”

He credited Tyson with having more stability than other pure chicken players but said with corn and soybean meal prices gaining daily, he’s now waving the caution flag.

Tyson CEO Donnie Smith told analysts in May the company had secured enough corn for the next five weeks, but thought it prudent to stay close to the market as he anticipated a huge crop growing ahead of schedule at the time.

Steve Kay, publisher of Cattle Buyers Weekly, says no one anticipated the extreme drought and heat that has fried much of the corn and soy beans still in the fields.

“It’s the biggest agriculture story of 2012 as corn prices are 50 to 60% higher than USDA forecast for this year. The forecast was $4.60 corn that is now trading between $7 and $8 per bushel.” Kay said.

He said company’s with animals to feed and those who use grains to make everything from corn-syrup to corn flakes will have to try and pass the higher operating costs along to consumers by the end of this year.

Meat prices are already more expensive than last year. All beef prices which includes ground hamburger was 5.6% higher than a year ago, according to the USDA choice beef price report in May, Kay said.

Chicken prices have risen 10% from a year ago, but Kay said 2011 prices were depressed because of excess supplies and lackluster demand.

Goldman wasn’t the only analyst to heed caution for Tyson Foods.

BMO Capital Markets also lowered its expectations for Tyson shares from a bullish outperform rating to a neutral position, while CLSA downgraded Tyson a step further to under-perform on Monday.

Shares of Tyson Foods have traded higher since the stock set a $15.22 low Monday.  At noon Wednesday (July 18) shares traded at $15.53, up 8 cents with twice the normal volume.

Analysts give Tyson shares a 12-month target price between $19 and $20.

Tyson will report earnings on Aug. 5 for the quarter ending June 30. Wall Street expects the meat giant to earn 52 cents per share or roughly $193 million in net income, a 13% improvement over last year.

Kay said margins will be squeezed tighter from now through the end of the year, which could mean processors slash poultry production and packers reduce hog slaughter.

He said fresh pork margins have been negative nearly all year, but packers like Tyson have still showed a profit.