The Zacks Analyst Blog Highlights: Tyson Foods, Hillshire Brands, Pilgrim's Pride, Pinnacle Foods and DryShips

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Jun 02, 2014, 09:30 ET

CHICAGO, June 2, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Tyson Foods, Inc. (NYSE:TSN-Free Report), Hillshire Brands Company (NYSE:HSH-Free Report), Pilgrim's Pride Corp. (Nasdaq:PPC-Free Report), Pinnacle Foods Inc. (NYSE:PF-Free Report) and DryShips, Inc. (Nasdaq:DRYS-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Friday's Analyst Blog:

Tyson Bids Higher for Hillshire

The battle between the meat companies are heating up as Tyson Foods, Inc. (NYSE:TSN-Free Report) makes a rival bid for packaged meat producer The Hillshire Brands Company (NYSE:HSH-Free Report), two days after Hillshire Brands received an all-cash acquisition proposal from chicken processor Pilgrim's Pride Corp. (Nasdaq:PPC-Free Report). Shares of Tyson Foods climbed 6.13%, while Hillshire Brands shares soared 17.7% on the news.

Tyson Foods has offered an attractive $50 per share in cash to Hillshire Brands' shareholders, valuing the company at approximately $6.8 billion. The transaction prices Hillshire at 13.4x its trailing twelve-month adjusted EBITDA as of May 9, 2014. This deal is definitely superior and a better alternative to the bid offered by Pilgrim's Pride on May 27. Pilgrim's Pride had offered $45 per share in cash for all of the outstanding shares of Hillshire amounting to $6.4 billion.

However, the competing offers are further complicated because both require Hillshire Brands to abandon its own plans to buy Pinnacle Foods Inc. (NYSE:PF-Free Report), as announced on May 12.

The Tyson deal is a strategic fit for both companies and their coming together will likely create a strong meat company with complementary brands and a consistent earnings stream. Tyson will benefit from Hillshire's innovation program and marketing abilities, and the strength of Hillshire's products in the breakfast category where the former has little presence.

Let's not forget that both these companies have solid brands and customer base. Moreover, the combined entity will be able to meet the growing demand for meat products. Tyson expects the proposed transaction to be accretive to earnings in the first full year after completion.

We note that Tyson, the largest U.S. meat processor by sales, and Pilgrim's Pride, the world's second-largest chicken producer after Tyson are looking for opportunities to expand their fresh meat business. However, both these companies are vulnerable to weather that has strained their beef, pork and poultry supplies lately. Moreover, an unrelenting drought in California and other parts of the country has squeezed the country's beef supply. A second outbreak of a deadly pig virus also led to soaring pig prices. Amid these hardships, the acquisition of Hillshire would definitely give an edge to the successful bidder in the food market, helping it to meet the growing demand for meat..

Both Tyson and Pilgrim's Pride expect their offer to be a better alternative to Hillshire's pending acquisition of Pinnacle, as their proposals provide a substantial premium and immediate cash benefit to Hillshire shareholders.

If Hillshire goes through with the Pinnacle acquisition, the shareholders of the latter will get $18.00 in cash and 0.50 shares of Hillshire Brands common stock for each share. Hillshire Brands plans to fund the transaction with $2.1 billion of equity and $4.8 billion of debt. The company expects to maintain its annual dividend of 70 cents a share but will suspend its share repurchase program to focus on debt paydown. This deal would expand Hillshire Brands' product offering and bolster its presence across the frozen, refrigerated and dry grocery categories. But for now, Hillshire has two alluring offers on its cards.

Chicago-based Hillshire stated that it will review both Tyson's and Pilgrim's proposals but added that it still believes in its plan to buy Pinnacle Foods.

Both Tyson and Hillshire Brands hold a Zacks Rank #3, while Pilgrim's Pride sports a Zacks Rank #1 (Strong Buy).

DryShips Drops to Strong Sell

On May 30, 2014, Zacks Investment Research downgraded DryShips, Inc. (Nasdaq:DRYS-Free Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

DryShips witnessed sharp downward estimate revisions following lower-than-expected first-quarter 2014 results reported on May 22. The company posted total revenue of $457.5 million that lagged the Zacks Consensus Estimate of $489 million, while delivered loss per share of 4 cents, against the Zacks Consensus Estimate of a profit of 2 cents.

As a result, we have been witnessing a downtrend in the Zacks Consensus Estimate. For the current year, the Zacks Consensus Estimate has plunged 35% to 13 cents per share whereas for the current quarter, the same declined 25% to 3 cents in the last 7 days. Notably, the company has missed the Zacks Consensus Estimate in all of the last four quarters, with a substantial average miss of 137.5%.

Despite an improving U.S. macroeconomic scenario, the drybulk shipping industry is still not out of the woods. This is solely attributable to non-economical decisions taken by the shipping companies in 2008, just before the onset of recession worldwide.

The increase in the number of vessels under operation resulted in intense price competition. Due to the lack of near-term foresight, most of the vessel operators had ordered large number of new build ships in several docks. This abundance of vessels resulted in severe cut-throat price competition.

The main problem for DryShips is that a major portion of its shipping contracts are currently under volatile spot rate market. Such a wide exposure will definitely result in severe top-line fluctuations, going forward.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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