Tyson Slumps as Analyst Cites ‘Convincing’ Class Action Suit

  • Complaint alleges Tyson, others companies colluded over prices
  • Stock slides 11% while Pilgrim’s, Sanderson shares also fall

Tyson Foods Inc., the largest U.S. meat processor, tumbled the most in six years after an analyst downgraded the stock and said a class-action lawsuit that alleges price collusion in the broiler-chicken market is "powerfully convincing."

The shares slumped as much as 11 percent and traded down 8.9 percent to close at $67.75 in New York. Pilgrim’s Pride Corp. and Sanderson Farms Inc., two other chicken producers named in the complaint, declined as much as 6.1 percent and 6.9 percent, respectively.

The lawsuit filed in Illinois district court on Sept. 2 says that starting in 2008, broiler-chicken producers including Tyson, Pilgrim’s and Sanderson colluded by sharing proprietary data and reducing production. The allegations assert that most of the $30 billion U.S. chicken industry engaged in a price-fixing scheme resulting in consumers paying 50 percent more.

For years, the price of a standard broiler chicken followed a boom-and-bust pattern as rising demand led to higher prices and more production, followed by oversupply and lower prices. That changed in 2008, according to the lawsuit, when producers launched a strategy to raise fewer chickens, constrain supply, and drive up the price.

For more on the lawsuit targeting chicken producers, click here

Pivotal analyst Tim Ramey wrote Friday in a note that while he wasn’t alleging Springdale, Arkansas-based Tyson colluded on pricing, the "narrative of this suit fits the fact-pattern of poultry pricing and margins over the past seven years."

"If true, it explains a lot," he said. "It explains why Tyson can offer EPS guidance with remarkable precision; boasting of margins at record levels well into the future. The Tyson of old did not provide guidance."

Pivotal cut its rating on the stock to sell from buy and slashed its target price to $40 from $100, saying “this downgrade does not happen without considerable thought." It’s the only sell recommendation of the 12 analyst ratings for Tyson compiled by Bloomberg. Ramey couldn’t be reached for comment.

Tyson said in a statement it disputes the allegations made in the complaint and the conclusions reached by Ramey. Sanderson Chief Financial Officer Michael Cockrell said by phone that while his company doesn’t comment on stock activity or pending litigation, it will defend itself "vigorously."

"Pilgrim’s strongly denies any allegations of market manipulation," the Greeley, Colorado-based company said in an e-mail. "The company welcomes the opportunity to defend itself against these claims through the legal process."

‘Highly Unlikely’

Price fixing in the competitive chicken industry is “highly unlikely” and “we see no evidence of consumers being harmed by price fixing,” Jeffries analyst Akshay Jagdale said Friday in a note. Chicken price movements can be “clearly explained” by fundamentals, he said.

“We think today’s reaction to concerns about price fixing allegations is overdone,” Jagdale said in the note.

Six proposed class action antitrust lawsuits brought by distributors, consumers and others against Tyson and 13 other chicken companies alleging collusion may put billions of dollars in damages in play, Bloomberg Intelligence analysts Jennifer Rie and Kenneth Shea said in a report. The lawsuits, which are likely to be combined before one judge in the fourth quarter, all assert that the companies colluded to limit broiler production and output to keep prices artificially high, according to a BI report.

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