November 22, 2007

 

Tyson Foods needs a strong 2008 for revenue turnaround

 

 

Despite a US$1 billion in operating revenues and the reduction of US$1.2 billion in long term debt from 2006 to 2007, investors in Tyson Foods Inc. have yet to reap the rewards.

 

The Springdale-based meat giant still has a way to go before the company's bond ratings climb out of the junk realm and its credit outlook garners a stable rating, analysts said.

 

The record sales revenues and stronger balance sheet look good on paper, but analysts said the gains have been absent in company's stock price and bond rating.

 

Tyson Foods' outlook is still negative despite the good year, said Jayne Ross, analyst with Standard & Poor's.

 

Ross, who downgraded the company's bonds last year, said Tyson Foods would need to have a strong year in 2008 before she could consider raising the company's credit outlook to stable.

 

The company and analysts have noted that Tyson Foods and the broader beef packing industry face tough challenges in the first half of 2008 with higher live cattle prices due to short supply and questionable export markets.

 

She said the solid 2007 results would be tough to repeat as cash flows will likely be thinner.

 

In 2007, Tyson Foods generated a respectable cash flow of US$603 million, a marked improvement from the cash flow deficit of US$286 million in 2006.

 

Much of that cash was used to pay down its debt from US$3.19 billion a year ago to US$2.73 billion as of September 30.

 

Ross said the company's debt reduction was impressive, but higher commodity and energy prices and other factors outside their control are negatively affecting the market prices of both its stocks and bonds.

 

Like the US Government and many other large companies, Tyson Foods finances its long term debt by issuing bonds.

 

Tyson Foods' financial outlook has added to its costs to service its debt. The company has reported that interest expenses increased by US$5 million last year after its bonds were downgraded to junk status by the three major credit rating companies.

 

The cost to insure its bonds also increased. In May, it cost Tyson Foods roughly US$6.7 million to insure US$1 billion in bonds for a year. After Tyson Foods reported that 2008 will be a tougher financial year, the cost escalated to $11.3 million for the same protection, according to data furnished by New York-based MarketAxess, a bond trading specialist and service center.

 

Part of the concern in the bond community is Tyson Foods' beef processing sector, which is losing about US$60 per each cattle slaughtered, according to industry watchers.

 

Craig Hutson, a bond analyst with Gimme Credit, a New York-based research firm said the massive discount of Tyson's bonds in recent weeks doesn't mean that now is a good time to buy.

 

Hutson expects the bonds to underperform the broader fixed-income market in the next year despite the $1 billion turnaround the company achieved in 2007.

 

Equity analysts also credit Tyson Foods management with crafting a stronger balance sheet but shareholders haven't seen that strength reflected in share price.

 

Wednesday (November 21), Tyson Foods shares (NYSE: TSN) closed at US$14.85, down 15 cents. Shares of Tyson Foods dropped to US$13.50, a 52-week low last Monday on the company's 2008 forecast and have since traded 10 percent higher. However, the stock is down 39 percent from its 52-week high of US$24.32.

 

Shareholder value is not expected to improve in the near term. In the recent conference call, Tyson Foods CEO Dick Bond asked investors to be patient with the company's international expansion plan. Tyson Foods is negotiating a small poultry acquisition in Brazil and two joint ventures in China.

 

The company has increased its goal for international sales from US$3 billion in fiscal 2007 to US$5 billion by 2010.

 

While analysts agree the international expansion is a good long-term move, it doesn't provide any gains in the short term for shareholders.