Tyson Foods’ Price Target From RBC Cut to $77

Tyson Foods (TSN) received a price-target reduction Tuesday from RBC Capital Markets, which cited greater-than-anticipated softness in chicken demand as the firm reduced its earnings estimates for the food company known for its namesake, Jimmy Dean and Hillshire Farm brands.

The cut comes a day after Tyson Foods reported fiscal Q3 adjusted earnings per share above analysts’ expectations but its revenue for the quarter missed the Street view. Still, quarterly gross margin improved and the company forecast fiscal 2019 revenue above analysts’ mean estimate.

RBC’s new price target on the stock is $77 per share, down from $82. The reduced target is still above the stock’s Monday closing price of $59.64. RBC kept its investment rating on the shares at sector perform.

In a note to clients, RBC said it lowered its estimates for Tyson’s fiscal 2018 and 2019 EPS and the price target “as a result of greater than anticipated softness in chicken demand — leading to a medium-term profit outlook 1-2 [percentage points] below its normalized range.”

The firm also cautioned that “competitor expansions in pork processing, plus tariff uncertainty (i.e. Mexico/China), [are] leading to greater-than-expected margin compression in that segment.”

Still, RBC noted it continues to forecast “beef profitability well above normal ranges” through potentially fiscal 2021, and modest profit growth in prepared foods with the help of synergies from Tyson’s acquisition of Advance Pierre.

“These positive offsets plus stock buybacks driven by strong [free cash flow] (9% ’19 FCF yield) should help drive high-single-digit EPS growth in ’19 and ’20, with potential for further [merger-and-acquisition] upside,” the firm added.

For its fiscal Q3 ended June 30, Tyson reported adjusted EPS of $1.50, up from $1.28 a year earlier and surpassing analysts’ mean estimate according to Capital IQ of $1.38. Revenue rose to $10.05 billion from $9.85 billion a year earlier, missing analysts’ mean estimate of $10.22 billion. Gross profit margin was 12.99%, up from 12.20% in the year-earlier period and above analysts’ mean estimate of 12.52%.

For fiscal 2018, the company reiterated its prior forecast for sales to be up by about 6% to between $40 billion and $41 billion. For fiscal 2019, Tyson said it sees sales climbing to $42 billion, above analysts’ mean estimate heading into the guidance of $41.25 billion; the Street view has since edged up to $41.40 billion.