Since the COVID-19 pandemic, Arkansas-based protein-focused food company Tyson Foods, Inc. (TSN) has faced difficulties, grappling with record-high cattle costs and elevated animal feed prices.
U.S. consumers are struggling with unprecedentedly high chicken prices at their local supermarkets, a trend expected to persist as TSN and its competitors scale back poultry production to improve profitability. Last year, TSN shuttered its processing facility in Van Buren, Arkansas, resulting in nearly 1,000 job losses.
The firm's cost-cutting measures impacted even more workers this year with the announcement to close six domestic chicken plants, affecting approximately 4,700 employees. The scheduled closure dates for these facilities are projected between late 2023 and early 2024.
Also, due to cost-effectiveness, inflation-affected consumers opt for chicken over beef and pork. This change in consumer patterns keeps chicken prices high, with indications pointing toward a persistent upward trend.
According to data from the U.S. Department of Agriculture, the U.S. per capita chicken consumption is likely to surpass 100 pounds for the first time this year. Simultaneously, the nation's beef consumption is predicted to slump to its lowest since 2018, owing to escalating prices and declining cattle supplies. Similarly, decreased consumer spending has pushed pork consumption to its lowest since 2015.
Let’s now understand the probable implications of escalating chicken prices.
Bull Cases
The monthly U.S. Department of Agriculture data unveils that retail prices in August for whole fresh chickens and bone-in legs reached nominal records. Drumstick prices rose 10%.
Given the strong consumer demand for chicken, the price rise may be impacted further due to production cuts. Government data has indicated a 2.8% decrease in eggs placed in U.S. incubator facilities in the six weeks leading up to September 23, compared to the same period last year – a clear contrast to the 2022 trend, which saw a 3.6% uptick.
Furthermore, there has been an approximately 2.7% reduction in chicks allocated for meat production from the prior year, which had seen a bounce of 4.5%. This strategic cutback has positively influenced the chicken market. TSN could capitalize on the record-high prices by transferring the inflated costs onto consumers. In addition, with corn prices at a three-year low, reduced feed costs could improve margins for producers.
Simultaneously, companies have been reducing bird weight to restrict production and regain profitability. This strategy inevitably means less meat is available for consumers.
Experts predict that after two quarters of running at a loss, TSN's chicken division should see a return to profit by the end of the quarter ending September 30. The current tightening of supplies should boost producers' profit margins.
For the fiscal year ending September 2023, TSN’s revenue is expected to grow marginally year-over-year to $53.36 billion, while EPS is expected to come at $1.18.
Bear Cases
The inflation-hit consumers have been shifting their preferences toward more affordable food items. This could potentially diminish the demand for chicken products. Consequently, TSN, a company significantly dependent on poultry sales as its primary business, may experience a slump in sales and revenue.
Moreover, the highly pathogenic avian influenza or "bird flu" outbreak, which resulted in approximately 58 million bird deaths over the year, could further implicate the need for chicken among consumers, adding to the declining demand. Concerns regarding avian welfare and heightened precautionary measures could increase production costs for meat producers.
The soaring inflation has forced TSN to contend with increased feed, transport, and processing expenses. This surge threatens to erode the profit margins of the meat producer, thereby significantly challenging its ability to compete with other industry players.
The chicken plant closure is feared to have a ripple effect through the agricultural ecosystem, directly impacting nearly 29 local farmers supplying chicken and grain producers responsible for chicken feed in Dexter. The impending shutdowns could affect approximately 300 plant workers in North Little Rock and over 500 jobs in Corydon, Indiana. About 1,500 individuals employed at the Noel facility, Missouri, would be heavily impacted.
TSN had encountered difficulties in hatching birds and staffing processing lines amid an unexpected surge in demand for chicken post-pandemic. The company now grapples with surplus stock as poultry demand remains flat and wholesale prices have experienced a dip. TSN's attempt to increase production has been ill-advised.
TSN has announced a significant loss of $198 million for the nine months that ended July 1, 2023. This is reportedly the meat producer’s most substantial loss over a nine-month period since 2009. Its chicken division reported an operating loss of $503 million for the same period.
Bottom Line
TSN’s chicken business is responsible for one-fifth of the U.S. market supply. Coupled with the abovementioned factors, the company is experiencing heightened competitive pressure from plant-based meat substitute companies. These alternatives are trending among consumers who seek healthier and eco-friendly dietary options.
Adding to TSN's challenges, there is an ongoing investigation by the Department of Labor into allegations that migrant children were employed at its facilities. Should these accusations prove accurate, the company could face substantial legal jeopardy and potential damage to its reputation.
With TSN's weak financial health, there have been amplified concerns regarding its valuation. The stock currently trades at a forward non-GAAP P/E multiple of 40.05, 136.5% higher than the industry average of 16.45.
Considering these circumstances, investors could exercise caution when making a decision to invest in the stock.
