Tyson Foods, Inc. (TSN) Deep-Fried Over Antitrust Allegations

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The past week hasn’t been a good one for Tyson Foods, Inc. (NYSE:TSN). It has also been anything but a fun one for TSN shareholders, with Tyson stock falling 9% on Friday, giving back a big piece of the 40% gain that had been reaped since the beginning of the year.

Tyson Foods, Inc. (TSN) Deep-Fried Over Antitrust Allegations

Then again, given the plausibility of the allegations made late last week that prompted a downgrade of TSN stock on Friday, it could have been worse.

Pivotal Research’s analyst Tim Ramey thinks the fallout from the accusation — whether proven or not — could create a major headwind for Tyson Foods, the likes of which it hasn’t seen since 2008. That’s when the company’s top and bottom lines started to grow considerably.

There was no clear explanation at the time, but the price-collusion allegations made in six different class-action lawsuits being levied against the company provide a logical explanation for that growth.

No Smoking Gun, But…

Six different but similar lawsuits against Tyson Foods and other chicken producers have been filed, with the most recent one materializing two weeks ago. They all essentially claim Tyson shared information with rivals like Pilgrim’s Pride Corporation (NASDAQ:PPC) and Sanderson Farms, Inc. (NASDAQ:SAFM) as a means of limiting production of poultry, and as a result, artificially propping up chicken prices. Such a practice violates antitrust laws.

Tyson denies the allegation, and simultaneously rejects Ramey’s rationals for downgrading TSN stock from a “hold” to a “sell.” The evidence though, even if circumstantial, is rather damning.

One of the key legs of the lawsuit points out chicken prices have jumped dramatically since 2008, outpacing the long-term trend of poultry’s typical inflation rate, and suddenly shrugging off what, up until then, had been a rather typical boom-bust cycle for the meat.

The timing of the company’s newfound consistent success was also suspect.

In 2006 and into 2007, several chicken producers including Tyson were brought to their knees by plunging meat prices … the result of an excessive but not unusual ramp-up in output in response to high meat prices seen just a year earlier. Since 2008, though — and particularly since 2013 — revenue growth has been uncharacteristically strong. So too have net income and net profit margin rates.

Tyson argues that its production cuts were all part of the normal course of business, and that higher chicken prices merely reflect higher chicken-feed costs. Corn prices, however, have fallen from a peak of more than $8 per bushel in 2012 to a multiyear low near $3 per bushel as of August, casting doubts on the company’s explanation.

TSN Stock Downgraded

While no conclusive evidence of collusion has surfaced, Pivotal Research’s Ramey believes there is enough legitimacy to the lawsuits that it could create problems for Tyson Foods going forward.

Ramey explains, “If true, it explains a lot. It explains why Tyson can offer EPS guidance with remarkable precision; boasting of margins at record levels well into the future. The Tyson of old did not provide guidance.” He added the “[the] narrative of this suit fits the fact-pattern of poultry pricing and margins over the past seven years.”

Perhaps doing more damage to Tyson stock than Ramey’s downgrade, though, is his revised target price for TSN. It was lowered from $100 per share to $40, with Ramey anticipating the suits will get traction in or out of a courtroom. He says, “Our thesis is that the class-action suit has merit and will lead to intense scrutiny of the broiler sector.”

Even if the case doesn’t have enough legal merit to move forward, however, now that the spotlight has been pointed at Tyson Foods, Pilgrim’s Pride and Sanderson Farms, the entire industry will be scrutinized. Any activity that even remotely appears as if it could be collusion will be dealt with, which has the potential to crimp practices that are simply solid strategic thinking.

Bottom Line for Tyson Foods

While the price target of $40 may be an extreme given the circumstances and the difficulty any lawyer will face in trying to convince a judge and jury that Tyson and its peers were willfully colluding, Ramey’s point is well taken all the same.

This boom cycle lasted a bit longer than it arguably should have, and the subsequent bust leg of the cycle could be similarly prolonged. Tyson stock may not have much, if any, upside to offer investors for a while.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/10/tyson-foods-antitrust-tsn-stock/.

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