Analysts: Drought weighs on Tyson profits

Meat processing margins remain under pressure for Tyson Foods Inc. as the company began its final quarter of fiscal 2012 on July 1.

Tyson will report its third quarter results Aug. 5. and while analysts expect the meat giant improved its recent profits from a year ago, they remain cautious about the balance of this year amid soaring grain costs related to the drought-stricken Midwest.

BB&T Capital Markets analyst Heather Jones, said processing fundamentals “played out better than we had anticipated” which allowed her to raise the third quarter estimate to 51 cents a share, from 47 cents per share. Wall Street earning’s consensus of 54 cents per share in the third quarter amounts to an expected $161.68 million in net profits, up 17.3% from the prior year.

That said, Jones and other analysts that follow the company foresee a weaker fourth quarter which prompted BB&T to trim Tyson’s full year profits to $1.93 per share, some 3% lower than originally forecast, according to a recent investor note by Jones.

She sees the longer-term outlook for Tyson as muted thanks to chicken processing margins, which were positive this year but are now compressed by higher grain costs. Corn and soybean meal are the two major feed components used in raising chickens. Corn is well on its way to $8 a bushel and soybeans are approaching $18 a bushel, up 22% and 9% respectively, in the last month.

BMO Capital Markets analyst Kenneth Zaslow also recently noted concerns regarding Tyson Foods' profit expectations. He reduced his target price from $32 to $20 per share. Tyson shares closed Monday at $17.09, down 50 cents.

Zaslow downgraded Tyson to market perform in anticipation of higher feed costs and lackluster foodservice demand that is likely to limit chicken breast prices. The Georgia Dock wholesale boneless breast prices averaged between $1.60 and $1.75 per pound in the quarter ending June 30. Since then prices have settled back below $1.60 per pound.

Tyson Foods told analysts in May it had enough purchased grain to get through June. Since then yield forecasts have been cut for soybeans and corn as much of the nation’s breadbasket is frying in record heat and drought-like climate.

Tyson CEO Donnie Smith has said the company will not over produce chicken at these expensive grain levels, preferring to buy commodity pieces in the secondary market to fill orders where necessary.

Local Tyson Foods' grower Casey Wilson said the Berryville complex he contractors for continues to see lay-out periods between flocks ranging from 20 to 25 days. He said higher bird mortality is also a problem because of spinal bacteria that has affected most of the flocks grown in his complex in recent months.

“This ridiculous heat is also a factor in higher bird mortality and keeping a lid on production because it’s affecting all growers across the south,” Wilson added.

Tyson has said its broiler production cuts are in line with U.S. Department of Agriculture estimates. Year to date, the USDA cites broiler production is down roughly 4% from levels last year.

Beef packer margins have been profitable since April, running wider-than-normal this time of year, according to HedgersEdge analyst Bob Wilson.

“Packers are making money but they lost a ton in the first quarter and most of last year. There’s ample cattle coming to market now and prices are strong,” WIlson said.

Beef margins averaged above $50 per head in the recent quarter and have since widened to $62 as of last week, according to HedgersEdge.

Jones also noted the short-term outlook for Tyson’s beef operations is positive, given ample cattle supplies after a reduced kill in early 2012. She notes an ongoing drought that has forced more cattle to market early will likely hurt margins in 2013.

Wilson said pork processors saw negative industry margins for the entire quarter ending June 30, except for the one week where packers pocketed 15-cents a pound.

“It’s been a tough ride as margins continue to run at a minimum $15 per-head-deficit,” Wilson said.