Stay Away from This Beef Provider
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Rains are the most beautiful aspect of nature. But apart from their beauty, they play a very important part in our life. Though we fail to understand their importance in our regular life, farmers are the ones who can deeply realize their value. Even meat companies who depend on crops to feed animals are highly dependent on rains.
This was affirmed by lackluster results of the players in the meat industry who have been finding it difficult to fight the uncontrollable drought conditions in the U.S. This is pushing their input prices north, resulting in higher meat prices.
Tyson Foods (NYSE: TSN) fell prey to this problem which was highlighted in its third quarter results posted earlier this month. The results failed to meet the estimates both on the top line and the bottom line, sending the shares down.
A Quick Look at the Numbers
With revenue almost flat at $8.31 billion, earnings dropped 2% to 50 cents per share, behind the estimate of 55 cents. The main problem was the increasing meat prices, which forced consumers to switch to cheaper options. Meat prices are skyrocketing due to increasing costs of animal feed which has been passed to the customers to some extent and is expected to continue with the ongoing drought conditions. Though the problem is not unique, since it has been a key concern for all the players in the industry, the uncertainty of weather conditions has made the situation far more difficult.
Moreover, concerns over the use of “pink slime” has also been a demand deterrent. But this has been easing out because of initiatives taken by many supermarkets of avoiding the use of ground beef. This will slowly reduce customer fear, resulting in healthy demand for beef.
Higher prices led to a 49% decline in profit from the meat segment and 44% for the pork segment. However, the shift of customers to cheaper options enabled Tyson’s chicken segment to show signs of relief which was the only segment in green. Also, food chains witnessed strong demand for its chicken products which made the company optimistic about the segment.
What about Other Industry Players?
Tyson’s arch rival, Smithfield Foods (NYSE: SFD), has also been experiencing the pinch of higher costs, resulting in a 30% plunge in profits to $361.3 million in its latest results. The company has been trying to boost its bottom line by restructuring its pork business. This will probably help it in cutting down on the costs and attain production efficiencies, and bring some relief to its shrinking margins.
Another competitor, in the packaged foods segment, Dole Food Company (NYSE: DOLE) has been planning to spin off its packaged foods operations since it has been witnessing large declines in its results. Its recent earnings fell 22% to 80 cents per share and revenue fell 10% mainly due to lower pricing and rising commodity costs.
Hence, Tyson Foods is not alone in its difficult times which have led the food giant to lower its revenue outlook by a million even though it plans to raise product prices. In fact it has also planned to cut down on its capital expenditures so that it can fight the prevailing problems conveniently. But what is more important to note here is whether drought conditions will improve in the coming time.
With such uncertainty prevailing in the environment and restrained spending of the consumers, the industry cannot expect to see better days by raising product prices. Moreover, the prevailing drought conditions can punish Tyson further making its animal feed more expensive.
The tradeoff of raising product prices and declining volumes is a big question to be answered here. It is very difficult to predict how customers will react to the situation. A smart way to tackle the situation can be strengthening its chicken segment which has been attracting budget conscious consumers. Hence, investors should wait till this tug of war ends with things settling down for the player.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.