Market watchers with Stephens Inc. have a positive outlook on Tyson Foods’ poultry segment despite rising feed costs and lower prices for consumers. Analysts with the Little Rock-based investment firm hosted a conference call with agri briefing company Urner Barry to talk about the poultry industry and the table egg business.
“We remain bullish on chicken producers despite the recent rise in feed costs and recent softness in breast meat pricing given forward supply looks to be manageable. African Swine Flu demand appears to be a clear demand driver going into the back half of the year and into early 2020,” noted Stephens analyst Ben Bienvenue.
He said the turkey market is still in slow recovery and the egg industry continues to face mounting losses among most producers.
“Tyson remains our top pick in the space followed by Pilgrim’s Pride. We remain more cautious on Cal-Maine, Hormel and Sanderson,” Bienvenue noted. (Stephens conducts investment banking activities with the companies in this report at times and is compensated accordingly.)
He said CalMaine is contending with low industry profitability, which they believe may take several quarters to shake out given the oversupply of poultry in the market. Hormel faces challenging retail trends and slow-to-improve turkey market fundamentals, he added. Bienvenue said Sanderson Farms is well-positioned to benefit from African Swine Flu (ASF) in fiscal 2020, but the company’s valuation leaves a smaller margin of safety and is something investors should consider.
The report states boneless breast prices have been under pressure as bird weights increased this spring because of cooler than normal weather. Leg quarters and wings are selling well above last year’s prices which are helping ease the impact from lower breast meat prices.
One area of caution for the poultry industry is feed costs which are expected to push higher given the late plantings and lower yield expectations. Tyson Foods said recently it has started buying grains directly from farmers to try and get the best prices possible. Tyson also said it’s forward buying contracts on grain are tied to the company’s needs and it does not speculate on the grain markets. Soybeans are around $8.89 a bushel. up 13.4% over last year. Cash corn prices at $4.58 a bushel are up 47.6% from last year, according to the Stephens Weekly Commodity Report on July 16.
Chicken production in the U.S. is up slightly from a year ago and the chicken meat sitting in cold storage continues to decline. Leg quarters supplies are down 42% from a year ago as domestic consumption has increased and exports have been solid. Breasts and boneless breast meat was down 7.2% year over year, which Stephens said is a positive indicator given inventory levels have increased in each of the previous five years.
Wings continue to benefit from improved foodservice demand with inventories down 25.6% from a year ago. Whole birds supplies were up 36% year over year in May as consumers transition into the summer grilling season.
“We expect cold storage levels to remain manageable in the near-term and may begin to draw down as the U.S. works to back-fill ASF demand in the global market,” Bienvenue noted.
Stephens estimated the chicken processing margin for the industry at 16 cents per pound in July, which was double the rate of a year ago, and one-cent higher than the industry’s five-year average.
Most market watchers say the industry is still making money despite rising grain costs which will be likely be factored into earnings later this fall. Tyson Foods reports earnings Aug. 5 ahead of Wall Street’s opening bell. The consensus estimate for Tyson’s third-quarter earnings is $1.46 per share on revenue of $11.1 billion. Earnings are expected to be down slightly from the prior year, while revenue growth is projected to be 10.4% year-over-year.
Tyson Foods shares (NYSE: TSN) were trading lower on Tuesday at $79.78, down almost $2 per share.