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Returns on Tyson Foods Inc. haven't exactly been chicken feed. The stock is up more than 50 per cent year to date and nearly 100 per cent during the past 12 months. Tyson along with other meat processors was pressured during last year's drought in the U.S., which raised the price of the grain these companies feed chickens, cattle and hogs. Now grain prices are falling in anticipation of a bumper crop. Last week, for example, only 2 per cent of the Midwest region was in drought, compared with 74 per cent a year ago, according to the U.S. Drought Monitor.
On Monday, Tyson's shares rallied to all-time highs following quarterly earnings that beat expectations. For the quarter to June 29, Tyson's net profit more than tripled. The year ago quarter included a charge for the early repayment of debt, but underlying profitability also rose. The chicken segment, which contributes about half of operating profits, had record operating income in the quarter with margins increasing to 7 per cent from 5.6 per cent a year ago as higher sales and prices offset rising input costs. Demand for chicken, as a cheaper and healthier alternative to beef and pork, is up and Tyson has transitioned from fixed contracts in recent years to be able to adjust its prices based on its grain costs.
With the favourable weather this year, the company should have the advantage of lower input costs. And, Tyson is expanding internationally, including in China where it stands to benefit from concerns about quality. Shuanghui International this year agreed to buy pork producer Smithfield Foods. Investors should be aware that the Tyson family, through a special class of stock, controls about 70 per cent of voting rights. At $30 (U.S.), Tyson trades at 11x forward earnings versus an average of 10 since 2010 and a high of 14. That isn't exactly chicken feed either, but might still be tasty.