This Large Meat Company is Making Dough

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The worst drought in more than 50 years in the US Midwest has affected the entire meat industry. Companies across all segments who use corn to feed their livestock are feeling the pinch of the rising corn prices.The largest U.S. producer and distributor of fresh-shell eggs, Cal-Maine (NASDAQ: CALM), reported in their second quarter earnings that gross profit declined 16.6% due to a 23.4% surge in feed costs.  This increase in prices has also not spared the meat companies, who are also suffering from a decline in their sales volume as the drought has led to the smallest cattle supply in more than 60 years. Tyson Foods (NYSE: TSN), the largest US meat company, is no exception. Tyson reported a decline in the sales volume for all of its three meat segments. However, things still look good for this company; despite continued challenges in the market its first quarter earnings surpassed the Street expectations.

The sad part:

Tyson reported a shrunken sales volume across its meat segment in their first quarter earnings. The company experienced the steepest drop in the beef segment, which reported 10% decline in the sales volume, followed by the pork and chicken segment with a decline of 2.2% and 1.1%, respectively. Tyson is not the only company to suffer from these sluggish sales. Its competitor, Smithfield Foods (NYSE: SFD), has also reported a 19.7% decline in earnings due to the lag in sales in their second quarter earnings.

Now, you must be thinking that with such decline in the sales volume how can Tyson manage to increase its quarter profit! Always remember that net sale is comprised of two factors: number of units sold, and sales price per unit.  Even when number of units sold decreases if the selling price per unit increases there can still be a rise in net sales. That’s exactly what happened to Tyson.

The pricing factor:

As the production of meat decreased due to the recent drought in US, the supply was not enough to satisfy the demand, resulting in a subsequent increase in the price. Average sale price per pound of beef surged up by 11.7% and chicken went up by 8.2%. However, prices of pork fell by 5.5% as consumers trying to save money switched to chicken.

Now it’s time to be happy:

Tyson’s fiscal first-quarter profit increased almost 11% to $173 million, or 48 cents per share, beating analysts’ expectation of 42 cents per share. Stronger prices for chicken and beef helped Tyson to offset the declining sales volume. Sales rose to $8.40 billion from $8.33 billion a year earlier. 

Tyson tripled operating profit in its chicken segment this quarter, reporting a 7% increase in the total sales. Beef segment also went up slightly by 0.5%. However, sale in the pork segment went down by 7.6% due to less consumer demand. In the prepared food segment, sales volume went up by 1.8%, but due to lower average sale price total sales slipped by 2.3%.

What’s in store?

Prices of raw materials are not expected to decrease in the near future. Thus to avoid the surging expenses of buying hay or corn, many farmers are discarding their herds which will keep their overall cost lower for the coming year. But this means there won’t be enough supply of meat to meet the demand ,which will further increase the price of meat.

For the coming fiscal year Tyson forecast a decline of 1% in its overall protein production. But with the anticipated increase in price, Tyson expects to increase their sales to approximately $35 billion.

The company plans to invest more than $27 million in their Sherman, Texas, Tennessee, and Virginia plants, and has also begun operations at their Jacksonville, Florida plant. All these plants will help Tyson support its key customers and will add to the company’s top line.

Foolish bottomline:

Tyson expects to continue to be profitable again in 2013. As I see it, the rising selling price of meat has opened a good opportunity for the company. Though the company will continue to suffer from a decline in production and an increase in cost, rising selling prices will help this company to post positive figures. I think this stock is worth watching.

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