The future isn’t looking very bright for Tyson Foods, according to Bank of America. The bank’s analysts on Wednesday downgraded Tyson to underperform from neutral and slashed the price target to $61 from $73. That implies a downside of nearly 10% from where shares closed Tuesday. “Since our earnings preview in which we lowered estimates, Beef fundamentals/margins have continued to deteriorate, while commodity Chicken prices/profitability continue to decline,” wrote analyst Peter Galbo. There’s also weakness in prepared foods, which continue to face stubbornly high input costs like beef and pork trim which could weigh on any margin expansion even with some price relief on pork bellies. In addition, the company has seen market share losses in prepared foods that it is working hard to regain. Bank of America’s lower price target reflects slashed earnings estimates for the next few years. Beef, chicken headwinds Weaker industry fundamentals in beef will weigh on Tyson Foods going forward. In mid-October, margins for beef packers even turned negative briefly. “While margins have recovered somewhat since then, they remain below September quarter-end levels and we expect that once holiday boosted seasonality in margins subsides, packers could again see compressed margins in beef,” Galbo said. “Cattle supplies have also remained plentiful as farmers move cattle through feed lots faster given drought conditions across the Midwest, which, upon completion, should result in higher spot cattle prices for packers next year.” Bank of America also forecasts a dip in cattle production through 2024. Chicken prices have also slipped as production has increased, weighing on margins. “It would stand to reason that the increases in production were largely a function of TSN righting the ship in terms of its chicken production, which would lead to significant volume growth for the company,” Galbo wrote. “This would also likely result in better fixed cost absorption for TSN’s chicken business as a result of higher volume.” On the flip side, Tyson’s improved production also likely cut commodity prices. “We continue to believe the dramatic rise in chicken prices this summer was the result of supply issues among the producers, which has now corrected dramatically,” Galbo said. Prepared foods The company recently made a change in its prepared foods division as it tries to regain losses. That may mean though that things get worse before they improve. “In addition, TSN is attempting to mitigate share losses in the Prepared Foods foodservice segment; the company noted on prior calls that inability to service demand properly during COVID led to share losses and the company is looking to win this business back,” Galbo wrote. “In addition we believe recent management changes, i.e., Noelle O’Mara replaced by CFO Stewart Glendinning, imply that profits could slip before they improve,” he said. — CNBC’s Michael Bloom contributed reporting
© heardonwallstreet.com