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Goldman Sachs downgraded Tyson Foods (NYSE:TSN) to a Neutral rating (From BUY) and cut the price target on the stock to $66.00 (from $91.00) following the food company’s 1Q23 earnings report. The results revealed a sharp deterioration in profitability across the organization, most notably in Chicken, undermining confidence that the cumulative effect of recent operational and strategic changes could sustainably improve margins and earnings for the company.
TSN reported adjusted FY1Q23 EPS of $0.85, well below the consensus estimate of $1.31. Weakness in the quarter was largely driven by underperformance in Chicken, where an expected contraction in competing protein availability and a subsequent demand increase in Retail failed to materialize, resulting in operating inefficiencies as inventories were liquidated to lower-value markets.
Goldman Sachs analysts wrote in a note, “In Chicken, we recognize higher feed costs and low commodity poultry prices are real market headwinds at the moment, but we had anticipated (consistent with initial management guidance in November) that these could be offset by improved live production/fixed cost absorption, automation investments, further processed mix, and cost-based price models over time. TSN management attributed the shortfall to higher aggregate domestic protein availability and specific surpluses of TSN retail tray pack production that needed to be diverted to more commoditized channels at significantly less favorable realized values. Importantly, however, TSN’s own significant increase in internal production (harvest volume +15% vs. segment sales volume +2.5%) represented a disproportionate share of industry growth. With increases in TSN’s internal harvest set to remain well above industry average this year, the importance of TSN accurately forecasting demand by channel to avoid similar short-term mix pressures moving forward only grows, in our view, and with it, execution risk.”
Shares of TSN are down 0.46% in premarket trading on Tuesday.
