EUR 850.00 For Business Accounts Only

Morningstar | Tariffs Weigh on Short-Term Prospects for Tyson, Pilgrim's, and Sanderson; Long-Term Thesis Intact

We plan mid- to high-single-digit percentage cuts to our fair value estimates for no-moat Tyson (currently $73 per share), Pilgrim's Pride ($34), and Sanderson Farms ($121) to reflect trade-related pressure that led Tyson to reduce its fiscal 2018 earnings per share outlook to $5.70-$6.00 from $6.55-$6.70 (we had called for $6.59). We expect it will take time for oversupply to clear and producers to redirect product to countries with more favorable trade regimes, but our long-term forecast, which already assumed profitability normalization from recent highs, should remain largely intact for all three firms.

The trade issues validate our no-moat ratings for these producers. While the industry has reduced volatility through cost-based contracting, strategies to reduce mismatches in cut demand, and specialty production, much of what drives results remains outside firms' control, including trade policy, weather, industry supply, and feed costs. We had expected conditions to normalize from strong years in 2015-17, with low-double-digit adjusted operating margins dipping into the high single digits for Tyson's chicken segment and Sanderson (acquisition activity has made Pilgrim's metrics less comparable). We anticipate trade challenges will accelerate that process, but over time we expect production and scale-based efficiency to combine with strong domestic demand to counteract the more difficult export conditions. As such, our long-term view of low-single-digit growth and high-single-digit operating margins should remain in place for all three firms.

While each firm carries risk, reflected in our high uncertainty ratings, we believe Pilgrim's offers the best opportunity. We expect its balanced portfolio of bird sizes, specialty lineup, and Mexican unit (with locally produced product) to drive results. The shares appear attractive despite our planned valuation cut, though Pilgrim's coming earnings report should offer more insight into the impact of trade upheaval.