Tyson CEO Surprises With Exit Amid Concerns Over Chicken Pricing

  • Donnie Smith quizzed on conference call over departure timing
  • Perception company has ‘reached peak earnings,’ analyst says

The planned departure of Tyson Foods Inc.’s chief executive officer triggered the biggest sell-off in the stock since the financial crisis as analysts questioned the timing amid mounting concern that U.S. benchmark chicken prices may have been inflated.

Donnie Smith is stepping down Dec. 31 and will be succeeded by President Tom Hayes, a 29-year veteran of the consumer products industry, the company said Monday. It also reported lower-than-expected fiscal fourth-quarter earnings and forecast 2017 profit that trailed analysts’ estimates.

Tyson, the largest U.S. chicken producer, is among companies named as defendants in a series of lawsuits filed since September claiming the poultry industry colluded over supplies starting from 2008 to drive prices higher. The companies have denied the allegations. Separately, the Georgia Department of Agriculture, which has gathered and disseminated the benchmark Georgia Dock chicken prices for more than four decades, said earlier this month it’s reviewing its current methodology and plans a new model.

Smith, 57, became CEO in 2009. He restored and boosted Tyson’s profitability before leading its $8.4 billion acquisition of Hillshire Brands Co. in 2014, a deal that further diversified the company into consumer brands such as Jimmy Dean sausages. Smith’s time in the top job has been Tyson’s "best period" and his departure is a “very bearish sign,” said Tim Ramey, an analyst with Pivotal Research Group in New York.

"With the issues we have discussed on chicken pricing, price-fixing allegations, and a tumultuous fourth quarter, we are not at all happy to see Mr. Smith step down,” Ramey, who has a sell rating on the stock, said in a note.

For more on the allegations that chicken companies colluded, click here

Haye’s promotion to president in June was an early sign of Tyson’s succession planning, according to analysts at JPMorgan Chase & Co. But other analysts, speaking on Tyson’s earnings conference call, expressed surprise at the timing of Monday’s announcement. The leadership shake-up comes amid concerns Tyson has reached “peak earnings,” BMO Capital Markets analyst Kenneth Zaslow said on the call.

"I have to say your timing of your retirement may not be perceived as optimal," Zaslow said. “Why not hand the reins over once the dust settles a little bit?”

Smith replied that it’s an “excellent” time to make the transition and that it isn’t related to the litigation. Springdale, Arkansas-based Tyson disputes the claims about price manipulation and will defend itself in court, he said.

“The company is performing exceptionally well and realizing significant growth in shareholder returns,” Smith said. “I believe the company has a bright future and that Tom is the right leader for this next phase of our development.”

Volume Decline

Tyson fell 14 percent to $57.60 in New York, the largest decline since Nov. 11, 2008.

The selloff may be overdone, Jeremy Scott, an analyst for CLSA Americas LLC in New York, said in a telephone interview. “The surprise in timing comes amid the external risk factors,” he said. Hayes “is likely to keep Tyson’s strategies and tactics on the right track,” JPMorgan Chase & Co. analysts Ken Goldman and Thomas Palmer said in a Nov. 18 note that predicted Tyson may announce Smith’s departure.

Profit excluding one-time items was 96 cents in Tyson’s fourth quarter, which ended Oct. 1, trailing the $1.16 average of 10 analysts’ estimates compiled by Bloomberg. Sales fell to $9.16 billion, compared with the $9.4 billion average estimate.

The company’s chicken business was particularly weak in the quarter, with revenue falling 7 percent on lower volumes.

For the fiscal year through September, Tyson forecast adjusted earnings of $4.70 to $4.85 a share, trailing the $4.99 average estimates.

Discussing the Georgia Dock price on the call, Hayes said Tyson only prices about 4 percent of its chicken off the benchmark.

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