by Steve McDonald, Bond Strategist, The Oxford Club
Friday, July 5, 2013
Tyson Chicken (NYSE: TSN) is in an enviable market position. It has negated one of the weakest links in the chicken business – feed costs – by negotiating contracts with suppliers that pass increased costs on to their customers. The result has been a surge in operating income in spite of a big increase in corn prices, the key ingredient in chicken feed. Fewer than 10% of its current feed contracts are on fixed terms.
And there’s more working in its favor.
There are virtually no breeding chickens left in the U.S. No breeding, no new chickens! You know the rest of that. Most have been shipped to Mexico to replenish their supply of birds that were wiped out by the avian flu.
Add to this mix the fact that the pork market has been swept up in a furor since a Chinese company made a bid for Smithfield Foods and that the price of beef is at recent highs, and you have a market made for chickens.
The best part of this story, though, is that the stock is trading at a stingy 10 times forward P/E, and Tyson is expected to see a 21% increase in earnings through September 2014.
Fewer birds. No feed cost surprises. High beef prices. And a P/E of 10. The only thing I am not thrilled about is that the stock price is 20% above its 200-day moving average. That usually means there is room for it to drop.
I’d put this one on your bogie board and look for weakness.
A Little Railroad That Can
Kansas City Southern (NYSE: KSU) railroad is the smallest of the seven major railroads, but it is the group’s best performer. Its numbers are mind-boggling.
It is up 344% since Warren Buffett ignited the rail world with his purchase of Burlington Northern.
According to Barron’s, its trains move faster and spend less time in terminals than the other six majors.
Since 2007 profits have soared by 145% while the rest of the group saw only a 30% increase.
Earnings this year, assisted by crude oil transport and the company’s lines into developing Mexico, are estimated to jump by 23%.
Traffic is up 9.2% on its Mexican lines in 2013 while traffic in the U.S. is down 1.6%. And 46% of its revenues are coming from its Mexican track.
The only downside is the stock is trading for about 21 times earnings compared to the rest of the group at about 15 times. But there are rumblings of a possible buyout by one of the bigger rail companies to gain access to KSU’s booming Mexican connection.
No one from the company has commented on the buyout rumors for the Barron’s article, but a company spokesman said they do not need to be bought. They are comfortable creating stockholder value with their present model.
Earnings growth, according to Andrew Davis of T. Rowe Price, is in the 15% area and could be higher if the shift of auto manufacturers to Mexico adds to the shipping needs. KSU is expected to get 50% of the new auto shipping out of Mexico.
The other wild card in rails is crude oil. The number of crude-filled rail cars, according to the Association of American Railroads, has jumped 166% in one year. KSU is expected to announce a new partnership with an unnamed oil operation to develop an oil unloading facility in Port Arthur Texas; right next to the Texas refineries.
According to credit Suisse analyst Allison Landry, crude earnings could drive Kansas City Southern earnings from $4.10 per share this year to $7.20 by 2015. That’s a big move!
Shares are expected to run this year to $130 from their current $107. It is currently priced at about 10% above its 200-day moving average, which is high. But for a long-term story with this kind of potential, I could bend my rule of at or near the 200-day just a bit.
KSU: This is a must-watch.
The “Slap in the Face” Award: Pathetic Excuses
This week it goes to one of the most pathetic excuse makers I have ever heard: Scott London, the former KPMG employee who has pleaded guilty to insider trading.
This week he said that insider trading is the biggest regret of his life. Yeah, he could go to jail for as long as 20 years. I’d call that a regret.
But what makes this a really well-deserved slap in the face is the fact that he has attempted to explain away feeding insider tips to a friend by saying he was only doing it to help him. He said his motivation was not the bags of money; it was only to help his friend.
They have this guy on film being handed bags full of one hundred dollar bills from this friend. How come my friends won’t let me help them that way?