Miniscule Margins in Meat

By Toby Shute

The Motley Fool

July 29, 2008

I've previously addressed the impact of the corn crunch on ethanol producers like Archer Daniels Midland (NYSE: ADM) and VeraSun Energy (NYSE: VSE), but they're not the only ones feeling grain pain. Meat producers like Pilgrim's Pride (NYSE: PPC) are also getting, well, slaughtered.

Shares of Tyson Foods (NYSE: TSN) have held up relatively better in the course of 2008. Unlike Pilgrim's Pride, the Mechagodzilla of meat is diversified across chicken, beef, and pork. That said, there's only so much diversification to be achieved when all of Noah's Ark is being fed the same staple grains.

In Tyson's fiscal third quarter, gross margin ran a thin 3.8%, and net margin was virtually zero. Let's look at each segment to gauge where the company needs to beef up profitability.

While Tyson's chicken segment passed the biggest price hikes on to customers, the 6.9% improvement wasn't nearly enough to offset the huge jump in grain costs. The chicken business ran at a loss for a second straight quarter.

Mark-to-market accounting belied some brawny beef results. With the recent lifting of the South Korean import ban, management has a new international outlet for its choice cuts, and expects to make much moo-lah going forward.

Pork also turned in a praiseworthy performance, with particularly strong exports to places like Mexico and Japan. The internationalization of Tyson is a major theme lately. The company has already established two joint ventures this year, in China and India, and says there are more waiting in the wings. Exports, along with renewable energy projects with the likes of ConocoPhillips (NYSE: COP) and Syntroleum appear to be the firm's major growth drivers going forward.

I'm not tripping over myself to pick up shares of Tyson, or any other name in the poultry or livestock spaces today, for that matter. Those input costs are simply killer. If I had to buy something today, it would probably be Sanderson Farms (Nasdaq: SAFM), which has carved itself a more profitable niche in a highly commoditized industry. Fortunately, I don't have to be so hasty -- I can just sit and wait for a livestock liquidation sale.

Tyson is rated a tepid two stars in Motley Fool CAPS.

Fool contributor Toby Shute is active in CAPS under the name of TMFSmashy, but doesn't have a position in any company mentioned. The Motley Fool has a meaty disclosure policy.

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