Tyson Foods’ shares rally on outlook, solid earnings

Tyson Foods' investors had much to be thankful for Monday morning (Nov. 19) as the meat giant’s stock price rose nearly 10% on an optimistic outlook for the next three years, according to CEO Donnie Smith.

Even though meat processing profits are harder to come by during extreme drought, Tyson Foods Inc. held it together and reported solid fourth quarter returns as a companion to the rosy outlook.

Tyson posted net income totaling $185 million, up 90.7% from the $97 million pocketed a year ago for the three months ending Sept. 30.

Wall Street analysts predicted a consensus 44 cents per share and Tyson answered with a net 51 cents in the period thanks to strong results in its chicken segment.

On the revenue side, Tyson fell a little short at $8.37 billion, compared to $8.49 billion a year ago. Compressed margins for pork are to blame for the slimmer revenue.

For the full year, Tyson earned $1.58 per share, and posted revenue of $33.27 billion.

Smith opened Monday’s earnings call with a bold, optimistic outlook, saying the company is poised to grow its top line between 3% and 4%, with valued-added revenue improving 6% to 8% and international sales twice that, at 12% to 16%.

The proposed growth comes in the face of higher grain costs, shrinking cattle supplies and growing global economic concerns, which has analysts scratching their heads, but holding the stock recommendations in check with a consensus neutral position.

Tyson shares rose more than $1.60, trading at $18.50 in heavy volume throughout the morning session on the optimistic tone.

"Our earnings … indicate that Tyson Foods is rising above the noise of commodity markets to produce solid, more consistent results," Smith noted. "It has taken us several years and a lot of work to get to this point, and although there is much more to be done, I believe we have reached a new level of sustainable performance.”

He said fiscal 2012 wasn’t a company best in terms of earnings, but did demonstrate a “best effort to date,” from the entire Tyson team.

“They didn't make excuses; they made a difference, and they made money,” Smith noted in the release.

CHICKEN
Tyson’s chicken segment had operating income of $116 million in the quarter and $446 million for the full year. Both periods had solid turnarounds from the prior year in excess of 100%.

Chicken sales totaled $8.37 billion and $32.27 billion for the quarter and year, respectively. The volume sold slid more than 3.5% while prices rose in excess of 9%.

Tyson said it spent $320 million in added grain costs in fiscal 2012 and expects difficult operational metrics in the coming year as corn and soybean meal prices are 16% and 53%, respectively, higher from a year ago.

Smith said Tyson is sourcing some of its grain out of South America. He said Tyson will renew its focus on more value-added products and its international sales moving farther away from commodity chicken production.

The commodity chicken operating margins were tight in the recent quarter given the higher grain costs.

To that Tyson reiterated that it will keep disciplined production in check and plan on buying the parts it needs on the open market to fill any short orders.

Smith said the buy-rather-than-grow strategy is being used to help insulate the company from volatile grain costs as the company moves toward more valued-added product mixes.

The company lost about $100 million in its chicken operations in Brazil and China, but expects that business to pick up in the next two years because of streamlined operations now in place.

Looking ahead to fiscal 2013, Tyson anticipates its chicken segment will remain profitable, but could be below the company’s normalized range of 5%-7%.

RED MEAT
The pork segment had operating income of $68 million and $417 million in the fourth quarter and fiscal year, respectively. The segment declined by $103 million in the full year because of higher fixed costs and lower pricing because of excess supplies.

Pork revenue totaled $1.31 billion and $5.51 billion for the quarter and year, respectively. Prices declined roughly 12% in both periods when compared to the prior year.

“We expect industry hog supplies in fiscal 2013 to be flat compared to fiscal 2012 and pork exports to remain strong. For fiscal 2013, we believe our pork segment will be in or above our normalized range of 6%- 8%,” said Jim Lochner, chief operating officer.

The beef segment returned operating income of $117 million in the quarter, down from $118 million in year ago period. For the full year, beef operating income was $218 million, down 53% from the prior year.

Beef sales also fell short in the quarter at $3.43 billion, despite an 11.6% jump in pricing. For the full year, beef sales totaled $13.75 billion, up slightly. But, demand was weaker as prices rose 14.4% from the prior year.

For fiscal 2013, “we believe our beef segment will remain profitable, but could be below our normalized range of 2.5% – 4.5%,” Lochner said.

PREPARED FOODS
The prepared foods segment, which includes food products made from chicken, pork and beef, had $39 million in operating income in the quarter and $181 million in the full year. Results were up 40% and 54%, respectively.

Revenue declined as raw material costs rose amid tepid average sales prices – putting a squeeze on top line margins.

FISCAL 2013 OUTLOOK
Tyson expects fiscal 2013 sales to increase to approximately $35 billion mostly resulting from price increases related to decreases in domestic availability of protein and rising raw material costs.

Tyson management said it would ask for higher prices among its customers, and didn't foresee a pushback coming from the record meat prices consumers will be paying again next year.

Because of higher expected operating costs Tyson scaled back its capital expenditures in 2013 to approximately $550 million, which was announced in the July earnings call.

“Once we gain more visibility into our working capital needs, or should forecasted conditions change, we may raise our capital expenditures target. We will continue to make significant investments in our production facilities for high return operational efficiencies, other profit improvement projects and development of our foreign operations,” Smith noted.

In an unexpected move, the company increased its regular dividend to shareholders by 25%, made possible by a strong balance sheet, liquidity position and a desire to return cash to its investors.

FINANCIAL SNAPSHOT
Tyson Foods (full year fiscal 2012)

Total Revenue
$33.278 billion, up 3.13%

Net Income
$576 million, down 21.41%

Earnings Per Share
$1.58, down 19.79%