The Golden Run Seems to Be Over For This Stock
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world needs to consume, which ensures relatively stable revenues for consumer goods companies. However a relatively stable top-line doesn’t indicate a profitable company, and both the growth prospects and the past financial performance need to be heeded for investment purposes.
The shares of Tyson Foods (NYSE: TSN) were beaten down this year, due to the drought conditions that drove up the prices of fodder. Animals require fodder as food, and a large population of farmers were not able to afford it, due to its inflated prices. Hence they were not able to deliver beef/pork, which in turn drove up the prices of meat products. Despite these inflationary pressures, Tyson Foods reported robust numbers. I believe that, with the next plantation, the price of fodder would decline (given that there isn't another drought), which in turn would lower the cost of meat products. Using this rationale, it's not hard to conclude that the margins of Tyson Foods could fatten in the near term future.
In the recent earnings release, despite a 0.4% drop in revenues, Tyson Food’s net income surged to $185 million, up from $97 million in the last year’s quarter. The EPS stood at $0.55 which beat the street’s estimates of $0.43. The company was able to report a profitable quarter, due to the price hikes of its products. Chicken products saw a hike of 9.4%, beef products 11.6% and Pork products by 12.2%.
Over the last three years, Tyson Foods has generated cash flows of $3.7 billion, out of which $2 billion was reinvested into its operations. Overall the company was able to reduce its debt burden by $1.1 billion. Tyson Foods ended the quarter with $2 billion in liquidity and net debt at $1.4 billion. The LT debt/equity equates to a modest 32%, and with solid cash flows along with huge liquid positions, I don’t think the company would be having any debt problems.
Additionally the company repurchased its 3.2 million shares from the market, which totaled to a $50 million repurchase. Share repurchases are important to follow, as they indicate the amount of faith and confidence, the board has in the company’s future. Also since the company has been performing exceedingly well, since the last 5 quarters, a share repurchase at this point of time, only strengthens the “confidence” theory.
ConAgra Foods (NYSE: CAG) recently acquired Ralcorp Holdings for $90 per share, and the deal was valued to be around $6.8 billion (including debt). The acquisition is expected to complete in 2013, and to meet up with the capital requirements, ConAgra would be issuing $350 million worth of new equity and would be taking a loan from Bank of America. Overall ConAgra foods would be raising $6 billion in debt to finance the deal.
Though management expects $225 million in annual costs savings beginning with 2017, analysts believe that Ralcorp was purchased at a premium. ConAgra already has a debt/equity level of 69%, and the fresh debt has raised a lot of eyebrows. Fitch has downgraded CAG and its peers Moody’s and S&P have put the company on a negative watch list citing debt concerns.
ConAgra also has a high payout ratio of 63% and recently raised its dividend to $0.25 per share. This further weakens the financial position for the company. Other major food processing and packaging companies, J.M Smucker (NYSE: SJM), Mead Johnson (NYSE: MJN) and General Mills (NYSE: GIS) all have lower payout ratios.
The Trend Is Your Friend…Until the End
Though ConAgra reported better than expected financials, I believe that ConAgra’s golden run is nearing its end. The company has a huge pile of debt, and the absence of a strong set of cash flows, to repay its debt in the short term. In my opinion, ConAgra could get cash strapped due to its liabilities and the debt would not allow the company to further expand or plan acquisitions. I believe that Tyson Foods makes a great investment option, as the company has been growing rapidly, with strong fundamentals and financials.
PiyushArora 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!