Tuesday, May 5, 2020

Investors Unable to Digest Tyson Foods F2Q Print

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What’s happening: Shares of Tyson Foods tumbled on Monday, after the meat producer missed expectations for its fiscal second-quarter results

What happened: The COVID-19 outbreak has caused severe production disruptions for the company, taking a massive toll on profits. Tyson Foods has also had to temporarily close some of its plants and reduce production in others with several employees testing positive for the coronavirus.

With people staying at home due to shelter-in-place orders by various governments, consumers are forced to eat at home. Moreover, while some restaurants are offering home delivery and drive-thru options, most remain closed. Although some regions are easing lockdown restriction, a return to normal habits of eating out may take months, leading Tyson Foods to project a decline in overall volumes in the second half of the year.

Despite these challenges, the company expects a surge in demand for one of its products during the coronavirus outbreak.

How were the results: Tyson Foods reported a decline in sales and earnings for the latest quarter, missing expectations on both fronts.

  • Net income declined to $364 million, or $1 per share, from $426 million, or $1.17 per share, in the same quarter last year.
  • Sales dropped to $10.89 billion, from $10.44 billion in the year-ago quarter, and failed to meet the consensus estimate of $14.08 billion.
  • Adjusted earnings came in at 77 cents per share, missing the Wall Street expectations of $1.04 per share.

Why it matters: Tyson Foods reported a steep decline in the US processing capacity with the virus crisis resulting in slaughterhouses being closed across the country.

The company is witnessing a surge in demand at grocery stores, with consumers now cooking meals at home. Its grocery store sales climbed 30-40%, while food-service revenues declined by 25-30%. Management feels that the spike in demand at grocery stores may not be enough to offset the lower demand from food service.

Tyson Foods is also positive about demand for its meat products during the pandemic. The company has projected a strong rise in global demand for meat and prepared foods, despite facing disruptions due to the virus outbreak.

With concerns rising around a shortage of meat products due to plant closures, President Donald Trump spoke last week with various food industry leaders, including Tyson Foods CEO Noel White, and ordered the country’s meat plants to stay open.

The company also disclosed that it had secured a term loan facility worth $1.5 billion to preserve overall liquidity during the pandemic.

How the shares responded: Shares of Tyson Foods fell 7.8% in regular trading yesterday following the release of quarterly results. The stock has declined by 34% over the past three months, and analysts believe the recent sell-off could present an attractive entry point into a business which has strong fundamentals.

What to watch: With President Trump ordering the reopening of meat plants, Tyson Foods may increase its production. Investors look forward to the company returning to its normal growth trajectory, keeping in mind the health and safety of its employees.

The Markets Today

     

US stocks will be in focus today, ahead of some major economic reports scheduled for later in the day.

Context: US stocks closed higher on Monday, after recording a strong recovery in the late session. Investors continued to focus on the growing tensions between the US and China over how the Asian country has handled the COVID-19 pandemic.

Details: Stocks turned positive late in the session, after WTI crude oil settled above the $20 level on Monday. US continued to blame China for how it has handled the pandemic. President Donald Trump also threatened to impose additional tariffs on the country at a time when the global economy is already struggling.

Investors also heeded comments by Warren Buffett, who said that his company Berkshire had sold its entire stake in airline stocks. Shares of American Airlines Group, Delta Air Lines, Southwest Airlines and American Airlines Group tumbled following the news.

Shares of Tyson Foods dropped around 8% on Monday, after the company reported downbeat earnings for its fiscal second quarter. Starbucks’ stock dipped around 3% after leading ratings agency Fitch lowered its credit rating for the company.

After falling 1.5% earlier in the session, the Dow managed to post a 0.1% gain to end the session at 23,749.76. The index got a fillip from shares of Apple and Microsoft moving north. The S&P 500 closed higher by 0.4%, supported by gains from the technology and energy sectors. At one point, the S&P 500 was also down by 1.2% during the early session. The Nasdaq 100 gained 1.2% to end at 8,710.7.

Economic data continued to show the negative coronavirus impact on the economy, with US factory orders shrinking 10.3% in March.

What to watch: Investors continue to keep an eye on the daily coronavirus numbers, with the total number of cases exceeding 3,584,320 globally. The number of positive COVID-19 cases in the US has surpassed 1,180,630 with around 68,930 deaths.

Markets await a basket of economic reports from the US, including balance of trade, services PMI and ISM non-manufacturing index. The US trade deficit is expected to increase to $44 billion in March, versus a gap of $39.9 billion in February. The IHS Markit services PMI is projected to decline to 27 in April, from a reading of 39.8 in March.

Other Markets: European indices were trading higher at 9:00am GMT, with the FTSE 100, German 30 and French 40 up by 1.8%, 1.7% and 2.1%, respectively.

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What else to watch today

     

Brazil's industrial production, Canada’s balance of trade as well as the US Redbook index, IBD/TIPP economic optimism index and API crude oil stock change.