On Wednesday, the U.S. Department of Agriculture (USDA) confirmed the discovery of highly pathogenic H5N2 avian influenza in a commercial turkey flock in Arkansas.
Famous chicken company Tyson Foods (TSN), which is also based in Arkansas, saw shares drop more than 5.6% on the news.
No Tyson birds are known to be carrying the H5N2 virus. Investors simply fear a repeat of 1983, when the infection reached 15 million birds and triggered a $117.3-million hit to the industry.
But before you jump to conclusions on Tyson’s future, let’s look at all of the facts…
Bullish Trend for Tyson Shares
Back in November, I wrote a bullish piece on Tyson in which I presented the company as an attractive opportunity – based on the future demand of high-quality proteins in urban centers.
The basis of the article was a U.N. report indicating the world’s population would grow one-third by 2050, with the majority of this growth occurring in urban areas.
As a result, the U.N. estimated the need for 200 million tons of additional meat to be produced over the next 40 years, which made Tyson a prime candidate to capitalize on this news.
A week later, my colleague Tim Maverick wrote an article in which he correctly predicted higher prices for high-quality proteins – especially chicken.
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So, this all begs the question…
If avian flu makes its way to the chicken population in Arkansas, is Tyson still a good stock to own?
The answer is a resounding “yes”!
Expect Volatility Ahead
While there may be some short-term pain for shareholders based on the H5N2 virus, as well as McDonald’s (MCD) insistence on moving to more-expensive antibiotic-free chicken, any share price declines will eventually reverse.
Tyson is just too well-run to expect any other outcome, which is apparent from its Q1 FY 2015 results…
The poultry company reported a total quarterly revenue of $10.8 billion, a 24.3% increase over the same quarter a year ago. Meanwhile, Tyson’s free cash flow increased by 162.8% to $581 million.
More promising, its adjusted operating income grew by 37% to $564 million. And the company achieved an adjusted EPS of $0.77. That’s a 6.9% increase over the $0.72 reported in the first quarter of the previous year.
Along with the impressive financial performance, the company also announced that it reduced its total debt by 8% to $650 million during the first quarter.
This is great news for long-term investors.
USDA officials consider the risk to humans from bird flu infections to be low, but the stock will see some volatility until this story plays out.
Just don’t mistake temporary volatility with a long-term negative trend for Tyson stock.