On Friday, January 27, the USDA reported that the size of the cattle herd in the U.S. is the smallest in 60 years, or 91 million. One the recent reasons for the declining herd count is the droughts last summer in Texas and Oklahoma, which caused a shortage of grass and water and thus ranchers sent more head to slaughter. Another major structural driver for the declining herd count has been the soaring price of corn over the past few years, driven by the demand for ethanol in gasoline. It has become increasingly costly to raise cattle in the U.S. due to the government decisions to increase mix of ethanol in gasoline. Additionally, the higher prices for corn and other crops has resulted in more land switching to crops and away from cattle. These factors have helped drive supplies to such low historic levels.
On the demand side, export growth of beef increased 22% last year, driven largely by the falling dollar that made US exports less expensive. Given the recent announcements by the Federal Reserve to keep interest rates at current levels into 2014 and the willingness to provide more stimulus, it would appear a weaker dollar remains likely.
I considered buying an ETF/ETN focused specifically on cattle future prices. I am not allowed to trade futures and derivatives in my IRA. The ETN iPath Dow Jones UBS Livestock Subindex Total Return (Ticker COW) appeared to fit the exposure until I looked at its performance. In 2011 retail beef prices increased over 10% but the price of COW actually declined.
I have a ~2% position in my IRA in Tyson Foods (Ticker TSN), one of the largest beef producers in the world as well as chicken and pork. The stock has performed reasonably well since I purchased it in October 2011, trades below 10x the consensus 2012 EPS estimate, and has a consensus recommendation of Overweight. Originally I had established the position to play falling corn prices, enabling the company to expand margins. This thesis may continue to play out as corn prices remain off their 2011 peak, in my view. Management gave a presentation in December outlining a close relationship between beef revenue and cattle prices. The company also has a strong presence as an exporter. One of the main risks, in my view, is that Tyson cannot pass along higher prices to the consumer as retail grocers like Albertsons push back against price increases. I expect price increases in the U.S. to eventually go through and export growth to provide extra juice for the company.
I decided to expand my position in TSN to ~4%.
Tyson Foods reports earning this Friday before the market open.
Showing posts with label TSN. Show all posts
Showing posts with label TSN. Show all posts
Monday, January 30, 2012
Tuesday, October 18, 2011
PEP: A Restructuring Story within the Declining Commodity Prices Theme
A couple weeks ago I laid out the theme of falling commodity prices within my Sagflation thesis, ultimately buying shares in Tyson Foods (Ticker TSN). In this post I continue with the deflationary theme but add in a restructuring story. One of my favorite signals when looking at a stock is a re-structuring or re-focusing of a strong brand. I call this the "Bain Capital" method since Bain Capital has a proven track record of buying distressed brand names and turning them around for a profit.
Pepsico, Inc. (Ticker PEP) has been popping up on my radar because of a re-emphasis on developing the popularity and identity of their brands, as opposed to just pushing volume. For about three years management has been focusing on improving productivity and re-investing savings back into R&D, brand-building and market-specific initiatives. During this time period of restructuring the returns of the business can appear worse than expected due to investment spending and uncertainty about the pay-off. However, as the investments begin to produce returns in the form of higher sales and improved margins, the stock can produce above average returns. For this reason, today I established a 2% position in PEP.
I have been considering Pepsico for its potential margin improvement due to my belief that commodity prices may continue to fall due to deflationary pressures. In the third quarter the gross margin declined 300 basis points annually, largely due to rising commodity prices. Sugar is a significant cost, as well as aluminum, corn, wheat, and gas. Due to a reduced supply of sugar from both Brazil and Australia, sugar prices have remained fairly high despite a pullback in other commodities. Since sugar prices have not declined significantly I have held back from Pepsico. That said, I expect more supply to come on the market as we roll through 2012 as growers are attracted by the higher prices in 2011. Management actively hedges commodity prices and the recent volatility may provide them with an opportunity to lock-in lower prices in 2012 relative to 2011, in my view. With all that considered, I decided Pepsico could benefit from falling commodities given its more stable sales characteristics and significant exposure to snack foods, which use corn and wheat. Wheat and corn prices have declined recently.
A risk to sales is that large retailers like Wal*Mart and Costco are able negotiate lower prices should the cost structure of Pepsico, and their competitors, decline due to falling commodity prices. Obviously these two retailers have significant leverage due to their size and from talking to a friend who has called on Costco, I know they can drive hard for price concessions. If Pepsico can increase volume of their products through their marketing campaigns, the company should have greater negotiating power when working with retailers. In addition, by improving productivity the company should be able to produce higher returns as the business lowers fixed costs and increases turnover. Improving returns should translate into an outperforming stock. That said, Coca-Cola has also worked on productivity improvements to lower its cost structure and has expanded vertically through its acquisition of the North American operations of bottler Coca Cola Enterprises last year.
Returning to the re-structuring plans, management began investing in its brands about 3 1/2 years ago when it focused on Gatorade. Management then moved to Tropicana, Pepsi Max, Sierra Mist, and Mountain Dew, each showing improvement. Now management is focused on Pepsi, a potential bigger bang for the buck after the cola fell to third place in the US in 2010 behind Coke and Diet Coke. Higher spending on marketing, funded by cost improvements, should enable Pepsi sales to improve going forward. In addition to the turnaround of established markets, the emerging markets remain a significant growth opportunity for the company to expand consumption with snack revenue growth of 31% in China and 26% in India this past quarter.
Last week they reported strong results after implementing price increases to offset rising commodity prices. An encouraging signal was that volume changes were within management expectations despite the price increase. Also encouraging was a reiteration of high single digit earning growth for 2011, despite less anticipated benefit from currency, implying the actual business is improving slightly better than expectations. Compare these results with a consensus EPS growth estimate of 6% in 2012 and I believe there is upside to forward year estimates should commodity prices fall or Pepsi sales improve.
The consensus analyst opinion is overweight for the stock. PEP trades at 13x the consensus 2012 EPS estimates. The dividend yield is an attractive 3.3%, higher than Coco-Cola's (Ticker KO) of 2.7%. PEP is trading close to its 52-week low.
Pepsico, Inc. (Ticker PEP) has been popping up on my radar because of a re-emphasis on developing the popularity and identity of their brands, as opposed to just pushing volume. For about three years management has been focusing on improving productivity and re-investing savings back into R&D, brand-building and market-specific initiatives. During this time period of restructuring the returns of the business can appear worse than expected due to investment spending and uncertainty about the pay-off. However, as the investments begin to produce returns in the form of higher sales and improved margins, the stock can produce above average returns. For this reason, today I established a 2% position in PEP.
I have been considering Pepsico for its potential margin improvement due to my belief that commodity prices may continue to fall due to deflationary pressures. In the third quarter the gross margin declined 300 basis points annually, largely due to rising commodity prices. Sugar is a significant cost, as well as aluminum, corn, wheat, and gas. Due to a reduced supply of sugar from both Brazil and Australia, sugar prices have remained fairly high despite a pullback in other commodities. Since sugar prices have not declined significantly I have held back from Pepsico. That said, I expect more supply to come on the market as we roll through 2012 as growers are attracted by the higher prices in 2011. Management actively hedges commodity prices and the recent volatility may provide them with an opportunity to lock-in lower prices in 2012 relative to 2011, in my view. With all that considered, I decided Pepsico could benefit from falling commodities given its more stable sales characteristics and significant exposure to snack foods, which use corn and wheat. Wheat and corn prices have declined recently.
A risk to sales is that large retailers like Wal*Mart and Costco are able negotiate lower prices should the cost structure of Pepsico, and their competitors, decline due to falling commodity prices. Obviously these two retailers have significant leverage due to their size and from talking to a friend who has called on Costco, I know they can drive hard for price concessions. If Pepsico can increase volume of their products through their marketing campaigns, the company should have greater negotiating power when working with retailers. In addition, by improving productivity the company should be able to produce higher returns as the business lowers fixed costs and increases turnover. Improving returns should translate into an outperforming stock. That said, Coca-Cola has also worked on productivity improvements to lower its cost structure and has expanded vertically through its acquisition of the North American operations of bottler Coca Cola Enterprises last year.
Returning to the re-structuring plans, management began investing in its brands about 3 1/2 years ago when it focused on Gatorade. Management then moved to Tropicana, Pepsi Max, Sierra Mist, and Mountain Dew, each showing improvement. Now management is focused on Pepsi, a potential bigger bang for the buck after the cola fell to third place in the US in 2010 behind Coke and Diet Coke. Higher spending on marketing, funded by cost improvements, should enable Pepsi sales to improve going forward. In addition to the turnaround of established markets, the emerging markets remain a significant growth opportunity for the company to expand consumption with snack revenue growth of 31% in China and 26% in India this past quarter.
Last week they reported strong results after implementing price increases to offset rising commodity prices. An encouraging signal was that volume changes were within management expectations despite the price increase. Also encouraging was a reiteration of high single digit earning growth for 2011, despite less anticipated benefit from currency, implying the actual business is improving slightly better than expectations. Compare these results with a consensus EPS growth estimate of 6% in 2012 and I believe there is upside to forward year estimates should commodity prices fall or Pepsi sales improve.
The consensus analyst opinion is overweight for the stock. PEP trades at 13x the consensus 2012 EPS estimates. The dividend yield is an attractive 3.3%, higher than Coco-Cola's (Ticker KO) of 2.7%. PEP is trading close to its 52-week low.
Monday, October 3, 2011
Stock Ideas During Falling Commodity Prices
The idea is to invest in companies that should benefit from falling commodity prices but not get hurt by slowing economic activity. Ideally, the company would also have strong brands or other competitive advantages that allow for stable prices of their products. This should enable margin expansion, and thus EPS growth above the average.
From the top down, I'm looking for companies with stable, almost annuity-like, revenue during economic cycles combined with a large percentage of expenses from materials. An example in my portfolio is Kimberly-Clark (ticker KMB), a consumer staple company that sells products like Kleenex and has significant costs associated with wood due to its paper-based products.
Of course, this idea assumes commodity prices continue to fall. Based on my Sagflation theme of slow-to-negative growth combined with volatile prices, in which I believe the current direction of prices is moving towards deflation, commodities should continue to decline. Significant government intervention in the form of fiscal and monetary stimulus could change this outlook.
In this article I review my investment in Kimberly Clark (ticker KMB), analyze a few companies with similar margin improvement potential due to falling commodity prices, and conclude with a decision to make 2-4% investment in Tyson Foods, ticker TSN.
First, a look at some commodity prices and their change this year:
Source: CNNMoney (http://money.cnn.com/data/commodities/)
The charts above illustrate that the largest price drops over the past year have occurred in copper. Over the past six months there has also been a significant drop in oil and cotton prices with more moderate pullbacks in corn and wheat. Not included in the charts is lumber, which has also seen a modest pull back in prices over the past couple months. Cattle prices have actually rallied strongly over the past. While I expect commodity prices, in general, to continue their decline as deflationary pressures strengthen, for the purposes of the current analysis I shall focus on oil, copper and agricultural products, excluding livestock.
Kimberly-Clark (Ticker: KMB) Cost of Products Analysis
Source: SEC Filings
In 2010 cost of products sold accounted for about 67% of revenue, highlighting the importance of raw material costs in the actual products and used during the manufacturing process. The primary raw materials in the company's products are recovered paper, synthetics, kraft pulp, cellulose pulp and recycled fiber. Natural gas, electricity, and petroleum-based products are key costs during the manufacturing process. Therefore pulp prices and oil prices can have a material impact on financials.
As seen in the charts above, oil prices have declined about 22% since the May peak. The Forestweb North American Pulp Index has dropped over 9% since the June peak. The gross margin for KMB dropped more than 400 basis points from 33.8% in 2Q10 to 29.6% in 2Q11, largely due to higher raw material costs, much of which the company does not hedge. Should oil and pulp prices continue to decline I expect to see the margins improve for the business, enabling above average EPS growth.
Looking over some other key metrics: annual dividend yield is a healthy 4%, the dividend increased 6% this year, TD/ EBITDA is a comfortable 1.5x, PE on '12 EPS is an okay 13.5x, and last month the consensus recommendation moved up to Overweight from Hold because one analyst upgraded. Five analysts have a Buy, ten have a Hold recommendation, and one Sell. I believe the stock is reasonably valued and the dividend yield combined with stable revenue should attract buyers in a weak market.
Sysco Corporation (Ticker: SYY) Cost of Sales Analysis
Sysco is a food distributor with significant fuel and food costs. Because of this position, I decided to look at the margin potential. For the purposes of this analysis, in which I am looking for potential margin expansion due to falling commodity prices, the key disclosure in the company's filing is the following, "we make a significant portion of our sales at prices that are based on the cost of products we sell plus a percentage markup." As a result, falling commodity prices are likely passed along to the customer in the form of lower prices, instead of retained by the company for margin improvement purposes.
Campbell Soup Company (Ticker: CPB) Cost of Products Sold Analysis
Campbell Soup is a food company whose significant costs include agriculture commodities like tomato paste. Therefore I looked at it as a candidate for margin improvements. The key disclosure in their SEC filings is the following, "The company also enters into commodity futures and options contracts to reduce the volatility of price fluctuations of diesel fuel, wheat, natural gas, soybean oil, aluminum, sugar, cocoa, and corn, which impact the cost of raw materials." Therefore there is likely not the upside to margins as commodity prices fall.
Cracker Barrel (Ticker: CBRL) Cost of Goods Sold Analysis
Cracker Barrel is a family-dining restaurant plus retail chain that are typically located next to highways. While not immune to economic slowdowns, their relative low average check, locations near highways, and established brand name can provide healthy revenue trends when gas prices fall, encouraging more people to drive. Thus the company is fairly unique in that falling gas prices can actually drive revenue. The concern is that the company's niche is largely in the lower-to-middle class income segment, which may be hurt proportionally more during an economic slowdown.
Source: SEC Filings
Gross profit was 68% in the fiscal fourth quarter (FYE July), down 170 basis points from the previous year. The primary cause of the higher cost of goods sold was a 2.9% increase in food commodity prices for the fiscal year. Looks promising so far. Dairy, including eggs, accounted for 13% of food purchasing expense in fiscal 2011. Beef, poultry, and pork each accounted for 11% of food purchasing expense. Together, these four segments accounted for 46% of food costs. The company raised menu prices 2% last year to offset the rising costs but the traffic declined about 2%, which may be due to the higher menu prices, weak economic environment, and also higher gas prices.
The key issue, in my mind, concerns the following disclosure about the fiscal 2012 outlook, "we presently expect the rate of commodity inflation to approximately double in 2012 as compared to 2011. We expect to offset the effects of food commodity inflation through a combination of menu price increases, supply contracts and other cost reduction initiatives." On the one hand, expectations are already set for higher commodity prices, providing room for upside should food prices actually fall. The problem is that beef prices are rising due to the droughts around Texas. On the chicken side you would think poultry prices would decline with lower corn prices. However, producers have been getting squeezed due to higher corn prices and thus have cut back production, suggesting poultry prices may remain firmer. Pork belly prices have declined about 5% since peaking in May, so this segment may offer some upside.
My conclusion is that food prices impacting Cracker Barrel may not go down as much, offering less upside to margins. Couple this with the uncertain impact of a weaker economy and I have decided to put this idea on the shelf.
Tyson Foods (Ticker: TSN) Cost of Sales Analysis
Tyson Foods, Inc. is a meat protein and food production company. It produces, distributes and markets chicken, beef, pork, prepared foods and related allied products. Its operations are conducted in four segments: Chicken, Beef, Pork and Prepared Foods. The largest revenue segment is beef, followed closely by chicken, which together account for almost three-quarters of revenue. Revenue is typically fairly stable during economic cycles, although can fluctuate due to prices for beef, chicken and pork.
Source: SEC Filings
After looking at Cracker Barrel, and trends in poultry prices, I found the chart below interesting. Basically, it summarizes the ratio between broiler prices (chicken) versus feed. The higher the ratio the better the margins for a chicken producer. The chart's labels are horrible, but basically the time line is from 2007 to the end of September 2011. I love this chart because it illustrates an unsustainable state in the market. Chicken producers are actively cutting back production because their margins are under pressure, suggesting broiler prices should remain at least stable in a weak economy. Additionally, I believe with corn and wheat prices declining the feed prices should decline, enabling the ratio to recover back above 1.0x.
Source: The Market Oracle blog. http://www.marketoracle.co.uk/Article30748.html
Because of the rising feed costs associated with corn and wheat prices, Tyson saw its gross margin decline 370 basis points in the quarter ended July 2. The company does actively enter into derivative and longer-term contracts in order to manage the volatility of prices like corn, live cattle, lean hogs, and natural gas. Thus how well they manage these positions likely impacts the margin potential, in my view.
A couple additional key metrics: The PE on C2011 is an attractive 8.5x. The consensus recommendation is Overweight, which has been stable for the past quarter. The company has met or exceeded EPS estimates each quarter during the past two years. The consensus EPS estimate for the September quarter is $0.31, a drop of over 50% from the previous year. Dividends have been stable over the past two years and the current annual dividend yield is about 1%. The company's debt has been upgraded twice by both Moody's and S&P over the past two years. TD-to- TTM EBITDA is just over a healthy 1x and the company plans to repurchase debt outstanding with cash on-hand. As of July 2, the company was authorized to repurchase over 18 million shares.
In conclusion, I plan to establish a 2-4% position in Tyson Foods based on what I believe is an outlook of stable protein commodity prices and falling feed costs, offering upside potential to estimates through margin improvements. In addition, I believe the valuation builds in a cushion for higher expected feed costs and worries about a demand slowdown.
From the top down, I'm looking for companies with stable, almost annuity-like, revenue during economic cycles combined with a large percentage of expenses from materials. An example in my portfolio is Kimberly-Clark (ticker KMB), a consumer staple company that sells products like Kleenex and has significant costs associated with wood due to its paper-based products.
Of course, this idea assumes commodity prices continue to fall. Based on my Sagflation theme of slow-to-negative growth combined with volatile prices, in which I believe the current direction of prices is moving towards deflation, commodities should continue to decline. Significant government intervention in the form of fiscal and monetary stimulus could change this outlook.
In this article I review my investment in Kimberly Clark (ticker KMB), analyze a few companies with similar margin improvement potential due to falling commodity prices, and conclude with a decision to make 2-4% investment in Tyson Foods, ticker TSN.
First, a look at some commodity prices and their change this year:
Oil (Light Crude)
 |
Copper
 |
Corn
 |
Wheat
 |
Cotton
 |
Live Cattle
 |
The charts above illustrate that the largest price drops over the past year have occurred in copper. Over the past six months there has also been a significant drop in oil and cotton prices with more moderate pullbacks in corn and wheat. Not included in the charts is lumber, which has also seen a modest pull back in prices over the past couple months. Cattle prices have actually rallied strongly over the past. While I expect commodity prices, in general, to continue their decline as deflationary pressures strengthen, for the purposes of the current analysis I shall focus on oil, copper and agricultural products, excluding livestock.
Kimberly-Clark (Ticker: KMB) Cost of Products Analysis
| 2Q11 | Y/Y | |
|---|---|---|
| Revenue ($mm) | $5,259 | + 8.3% |
| Gross Margin | 29.6% | - 4.2% |
| Op. Margin | 11.9% | - 2.7% |
| Dil. Op. EPS | $1.18 | - 1.7% |
Source: SEC Filings
In 2010 cost of products sold accounted for about 67% of revenue, highlighting the importance of raw material costs in the actual products and used during the manufacturing process. The primary raw materials in the company's products are recovered paper, synthetics, kraft pulp, cellulose pulp and recycled fiber. Natural gas, electricity, and petroleum-based products are key costs during the manufacturing process. Therefore pulp prices and oil prices can have a material impact on financials.
As seen in the charts above, oil prices have declined about 22% since the May peak. The Forestweb North American Pulp Index has dropped over 9% since the June peak. The gross margin for KMB dropped more than 400 basis points from 33.8% in 2Q10 to 29.6% in 2Q11, largely due to higher raw material costs, much of which the company does not hedge. Should oil and pulp prices continue to decline I expect to see the margins improve for the business, enabling above average EPS growth.
Looking over some other key metrics: annual dividend yield is a healthy 4%, the dividend increased 6% this year, TD/ EBITDA is a comfortable 1.5x, PE on '12 EPS is an okay 13.5x, and last month the consensus recommendation moved up to Overweight from Hold because one analyst upgraded. Five analysts have a Buy, ten have a Hold recommendation, and one Sell. I believe the stock is reasonably valued and the dividend yield combined with stable revenue should attract buyers in a weak market.
Sysco Corporation (Ticker: SYY) Cost of Sales Analysis
Sysco is a food distributor with significant fuel and food costs. Because of this position, I decided to look at the margin potential. For the purposes of this analysis, in which I am looking for potential margin expansion due to falling commodity prices, the key disclosure in the company's filing is the following, "we make a significant portion of our sales at prices that are based on the cost of products we sell plus a percentage markup." As a result, falling commodity prices are likely passed along to the customer in the form of lower prices, instead of retained by the company for margin improvement purposes.
Campbell Soup Company (Ticker: CPB) Cost of Products Sold Analysis
Campbell Soup is a food company whose significant costs include agriculture commodities like tomato paste. Therefore I looked at it as a candidate for margin improvements. The key disclosure in their SEC filings is the following, "The company also enters into commodity futures and options contracts to reduce the volatility of price fluctuations of diesel fuel, wheat, natural gas, soybean oil, aluminum, sugar, cocoa, and corn, which impact the cost of raw materials." Therefore there is likely not the upside to margins as commodity prices fall.
Cracker Barrel (Ticker: CBRL) Cost of Goods Sold Analysis
Cracker Barrel is a family-dining restaurant plus retail chain that are typically located next to highways. While not immune to economic slowdowns, their relative low average check, locations near highways, and established brand name can provide healthy revenue trends when gas prices fall, encouraging more people to drive. Thus the company is fairly unique in that falling gas prices can actually drive revenue. The concern is that the company's niche is largely in the lower-to-middle class income segment, which may be hurt proportionally more during an economic slowdown.
| F4Q11 | Y/Y | |
|---|---|---|
| Revenue ($mm) | $613 | 0% |
| Gross Margin | 68.4% | - 1.7% |
| Op. Margin | 6.2% | - 1.2% |
| Dil. Op. EPS | $0.25 | + 14% |
Source: SEC Filings
Gross profit was 68% in the fiscal fourth quarter (FYE July), down 170 basis points from the previous year. The primary cause of the higher cost of goods sold was a 2.9% increase in food commodity prices for the fiscal year. Looks promising so far. Dairy, including eggs, accounted for 13% of food purchasing expense in fiscal 2011. Beef, poultry, and pork each accounted for 11% of food purchasing expense. Together, these four segments accounted for 46% of food costs. The company raised menu prices 2% last year to offset the rising costs but the traffic declined about 2%, which may be due to the higher menu prices, weak economic environment, and also higher gas prices.
The key issue, in my mind, concerns the following disclosure about the fiscal 2012 outlook, "we presently expect the rate of commodity inflation to approximately double in 2012 as compared to 2011. We expect to offset the effects of food commodity inflation through a combination of menu price increases, supply contracts and other cost reduction initiatives." On the one hand, expectations are already set for higher commodity prices, providing room for upside should food prices actually fall. The problem is that beef prices are rising due to the droughts around Texas. On the chicken side you would think poultry prices would decline with lower corn prices. However, producers have been getting squeezed due to higher corn prices and thus have cut back production, suggesting poultry prices may remain firmer. Pork belly prices have declined about 5% since peaking in May, so this segment may offer some upside.
My conclusion is that food prices impacting Cracker Barrel may not go down as much, offering less upside to margins. Couple this with the uncertain impact of a weaker economy and I have decided to put this idea on the shelf.
Tyson Foods (Ticker: TSN) Cost of Sales Analysis
Tyson Foods, Inc. is a meat protein and food production company. It produces, distributes and markets chicken, beef, pork, prepared foods and related allied products. Its operations are conducted in four segments: Chicken, Beef, Pork and Prepared Foods. The largest revenue segment is beef, followed closely by chicken, which together account for almost three-quarters of revenue. Revenue is typically fairly stable during economic cycles, although can fluctuate due to prices for beef, chicken and pork.
| F3Q11 | Y/Y | |
|---|---|---|
| Revenue ($mm) | $8,247 | 11% |
| Gross Margin | 6.4% | - 3.7% |
| Op. Margin | 3.8% | - 3.0% |
| Dil. Op. EPS | $0.46 | - 31% |
After looking at Cracker Barrel, and trends in poultry prices, I found the chart below interesting. Basically, it summarizes the ratio between broiler prices (chicken) versus feed. The higher the ratio the better the margins for a chicken producer. The chart's labels are horrible, but basically the time line is from 2007 to the end of September 2011. I love this chart because it illustrates an unsustainable state in the market. Chicken producers are actively cutting back production because their margins are under pressure, suggesting broiler prices should remain at least stable in a weak economy. Additionally, I believe with corn and wheat prices declining the feed prices should decline, enabling the ratio to recover back above 1.0x.
Because of the rising feed costs associated with corn and wheat prices, Tyson saw its gross margin decline 370 basis points in the quarter ended July 2. The company does actively enter into derivative and longer-term contracts in order to manage the volatility of prices like corn, live cattle, lean hogs, and natural gas. Thus how well they manage these positions likely impacts the margin potential, in my view.
A couple additional key metrics: The PE on C2011 is an attractive 8.5x. The consensus recommendation is Overweight, which has been stable for the past quarter. The company has met or exceeded EPS estimates each quarter during the past two years. The consensus EPS estimate for the September quarter is $0.31, a drop of over 50% from the previous year. Dividends have been stable over the past two years and the current annual dividend yield is about 1%. The company's debt has been upgraded twice by both Moody's and S&P over the past two years. TD-to- TTM EBITDA is just over a healthy 1x and the company plans to repurchase debt outstanding with cash on-hand. As of July 2, the company was authorized to repurchase over 18 million shares.
In conclusion, I plan to establish a 2-4% position in Tyson Foods based on what I believe is an outlook of stable protein commodity prices and falling feed costs, offering upside potential to estimates through margin improvements. In addition, I believe the valuation builds in a cushion for higher expected feed costs and worries about a demand slowdown.
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