020107 Tyson Charged with Smuggling Illegal Aliens

Tyson’s latest problems erupted last month, when a federal grand jury issued a 36-count indictment alleging that six employees (two executives and four former managers) conspired to smuggle illegal aliens into the company's poultry processing plants. The practice of employing illegal aliens, the indictment said, was tolerated so the company could meet production goals and cut costs.

In a Dec. 19 statement, Tyson described the indictment's allegations of a conspiracy as “absolutely false.” But that did little to stem the immediate sell-off in the stock. Tyson shares shed 10.4% in two days, falling to $10.39.

While other chicken analysts moved to the sidelines, Prudential Securities' John McMillin issued a note the day after Tyson's statement saying, “This too shall pass.” While making no bones about the company's lousy track record - indeed, it's hard to ignore - McMillin said the $100 million in profits that authorities are potentially targeting seemed awfully high. That type of sum suggests that Tyson's entire payroll was illegal, he wrote. “Intuitively, it just doesn't makes sense to us.”

“When the dust settles, the financial impact to Tyson, if any, should be far less than the hit to Tyson's market cap,” McMillin wrote. “Sooner or later, investors will begin to look at fundamentals, which are the best they have been in years.” He pointed to the latest ConAgra Foods financial report, which saw earnings for its meat-processing group increase 51%. “If ConAgra's results are a premonition of better things to come,” McMillin wrote, “investors have a solid entry point into Tyson stock, which we believe will be closer to $15 per share a year from now, a nice potential return from current levels.”

The Reality

Thursday after the close, Tyson announced that earnings for its first quarter (ended Dec. 29) would come in far greater than expected: 34 cents to 36 cents a share, vs. its previous guidance of 22 cents to 27 cents. John Tyson, chairman and chief executive, said that the company's position as the leading global supplier of beef, chicken and pork served it well despite the lackluster economy at the beginning of the quarter.

What's more, Tyson's debt load is easing. Since the company closed its acquisition of IBP, the world's largest beef supplier, in August, it's repaid more than $550 million in debt. That left it with total debt of $4.35 billion at the end of the first quarter, less than analysts were expecting.

Beleaguered Tyson shares sizzled 9% higher to $12.54 on quadruple their usual trading volume. Investors who heeded McMillin's advice two weeks ago were sitting on a juicy 21% gain at the end of trading on Friday. That ain't chicken feed.

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