Tyson Downgrade Brings Choked Chicken Margin Fears

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It is not that frequent that an analyst downgrade sparks a 7% drop in a stock. That is why we are focusing on this big analyst downgrade in Tyson Foods Inc. (NYSE: TSN). BofA/Merrill Lynch downgraded Tyson to Neutral from Buy with a $32 price target. The prior target was $33 on the stock. The ramifications are strong enough that shares of rival Pilgrim’s Pride Corp. (NYSE: PPC) traded lower just as though they are the same company.

The Merrill Lynch team of Ryan Oksenhendler and Bryan Spillane said that industry data indicates a steep increase in production. This will cause industry margins to peak sooner than expected. Supply indicators have increased faster than expected in both chickens and in eggs bringing a likely significant increase in production in the spring and summer of 2014.

Monday’s downgrade also highlights that the industry does not appear to be making its seasonal cuts for fall when demand declines. It even showed egg sets have increased 5% from a year ago and have averaged 3.5% annual gains over the last 10 weeks.

While a significant decrease in grain costs is supposed to help on chicken production costs, the expected increase in production will both weigh on chicken pricing and will likely limit upside to margins. The research team does believe that Tyson is in a better position than most of its competitors. It has cost-plus or grain adjustments in many contracts, as well as multi protein offerings. BofA has trimmed its 2014 estimates based on an expected lower chicken prices, from $2.80 per share down to $2.70 per share, but chicken margins are still expected to be solid at 6.3%.

Tyson Foods was down 7.3%a t $29.17 right at the closing bell on three-times normal trading volume as more than 10.6 million shares traded hands. The downgraded choked other meat producers as well. Pilgrim’s Pride saw its shares slide 7.7% to $15.47 as well.