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Tyson Beats Rivals as Commodities Rise

Stocks in this article: TSN HRL SFD PPC SAFM

(Editor's note: Updates to reflect today's earnings release from Tyson.)

BOSTON ( TheStreet) -- Tyson (TSN), the world's largest meat company, is satisfying protein-hungry diets outside the U.S. That led to fiscal first-quarter sales jumping 15%, and profit margins widening almost 50%.

Yet, with commodity prices on the rise, Tyson will have to keep passing those costs on to customers if it wants to keep improving. Tyson reported fiscal second-quarter profit of 42 cents per share today, falling slightly short of analysts' estimates of 43 cents. Revenue of $8 billion exceeded expectations of $7.54 billion, yet gross margins narrowed to 6.7% from 8.2%

Tyson has made great strides. Key initiatives such as better inventory control and a focus on efficiency at production plants has led to $600 million in performance improvements in its chicken business alone over the past three years. Investors have taken notice, with the stock up 13% this year, easily exceeding the performance of the S&P 500 over the same period.

But commodity prices are now a black cloud looming over many food producers. Prices for corn, the main ingredient in livestock feed, have almost doubled in the past year. The Grain Stocks report, issued by the USDA's National Agricultural Statistics Service, notes that corn supplies in March were down 15% from a year earlier. Government-subsidized ethanol producers (which consume nearly 40% of the U.S. corn crop) and decreases in corn supplies will likely drive prices higher. Tyson itself acknowledges that the large imbalance between supply and demand for corn and soybean meal will prove challenging to its chicken business. The company is still predicting profits for the rest of 2011.

Competitors such as poultry producer Pilgrim's Pride (PPC) (down 22% this year) haven't been able to withstand the increased prices in chicken feed. The company recently reported a big first-quarter loss due to high feed costs, but also because of decreased chicken prices and high inventory levels. On the other hand, Tyson has smartly managed grain costs. Management said on its fiscal Q1 call that it has "Q2 pretty well covered at levels higher than Q1, and below current market."

When people think of Tyson, chicken comes to mind, but it might be surprising to learn that chicken accounts for only 34% of overall sales. Beef (41%), pork (16%) and prepared foods (10%) account for the remainder, a diversification in business lines that can help absorb raw-material increases.

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