Tyson's Chickens Come Home to Roost

Bad hedges and high chicken prices have analysts squawking about Tyson's earnings

By Wendy Zellner

Even as a new $75 million ad campaign promotes how its protein is "powering the world," Tyson Foods' (TSN ) stock looked anything but strong on Aug. 30. Thanks to some bad bets on grain prices and weaker-than-expected demand for chicken and beef, the Springdale (Ark.) outfit said its fiscal-year earnings would fall short of expectations. The announcement drove the stock down more than 8%, to close at $16.26.

Excluding one-time items related to mad cow disease and plant closings, Tyson expects earnings per share of between $1.26 and $1.33 for the year ending in September. The analysts' consensus was $1.45. After Tyson's announcement, Merrill Lynch (MER ) analyst G. Leonard Teitelbaum lowered his forecast to $1.30, from $1.46, for this fiscal year and cut next year's number from $1.53 to $1.40. CEO John Tyson noted in a statement that the full-year earnings improvement is still expected to be "excellent" -- up 56% to 64% after adjusting for one-time items. Results will be reported on Nov. 15.


  A major factor in Tyson's disappointing forecast was "unfavorable results from grain-hedging activity," according to the company. As grain prices were rising earlier this year, Tyson "went long in a market that fell and the hedges were under water," says Teitelbaum. But he notes that hedges netted $140 million in the first nine months of this year. Hedging woes have also hurt rivals Sanderson Farms (SAFM ) and Smithfield Foods (SFD ). The good news is that lower grain prices should help Tyson cut costs going forward.

At the same time, demand for both chicken and beef has been weaker than expected. A Tyson spokesman attributes that to higher prices, rather than a consumer shift away from protein-rich diets. Nor is the situation unique to Tyson. Consultant Charles Stacey says its woes reflect an industrywide problem.

Poultry prices "really spiked up over the last four or five months," notes Stacey, in large part because fast-food companies, such as McDonalds (MCD ), introduced new chicken products and built inventories for the launch. But the high prices caused supermarkets to pull back on promotions featuring chicken. "I don't know that [chicken prices have] found bottom yet," says Stacey. "That's what people are worried about."


  With its broad portfolio of beef, chicken, and pork products, Tyson, the nation's largest meat producer, is able to ride the industry's swings better than most. Teitelbaum figures that the U.S. could soon open the border to Canadian cattle, and a greater supply of beef at its plants would lower Tyson's production costs. Plus, Japan is expected to lift its mad-cow-related ban on U.S. beef exports in the near future.

An improved import/export picture should mean a better year for Tyson's beef operations in 2005, even as chicken faces a tougher challenge. But after coping with mad cow scares, fallout from avian flu -- which hurt U.S. poultry exports early in the year -- and soaring grain costs, the protein powerhouse should be ready for anything.

Zellner is a correspondent in BusinessWeek's Dallas bureau

Edited by Patricia O'Connell

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