Tyson Foods flies high on profit forecast

Wall Street has heaped lofty goals upon Tyson Foods, forecasting a net income per earnings increase of 18% and revenue growth of 4% in the company’s third quarter results which will be reported on Monday (Aug. 5) ahead of the market opening.

The street consensus is 59 cents a share in net income earned from April 1 through June 30. A year ago the Springdale-based meat giant pocketed 50 cents a share, before a 29-cent charge related to early debt retirement totaling $167 million.

Revenue predictions for the third quarter top $8.66 billion, up from $8.31 billion a year ago.

Tyson also is coming off of a quarter where net income for sank nearly 43% as Tyson pocketed $95 million in profits, compared to $166 million a year ago. This equated to 26 cents a share, falling short of the 44 cents earned a year ago and the 45 cents Wall Street expected.

CEO Donnie Smith was upbeat last quarter telling analysts the rest of the year would be better and so far the metrics are lining up to prove him right.

SEGMENT METRICS
In the chicken segment, processors have been making solid profits thanks to strengthening in breast meat prices above the $2 mark per pound wholesale price.

A competitor, Pilgrim’s Pride, reported stellar profits this week linked to the better wholesale pricing, thanks to the disciplined fundamentals the industry has embraced to keep supplies in check with demand.

“We are seeing discipline across the industry in managing average live weights. Additionally, demand for chicken in the U.S. is solid to excellent at retail and improving at foodservice due to its value compared to beef and pork,” said Pilgrim’s CEO Bill Lovette.

He said U.S. Department of Agriculture data shows that declines in red meat for May and June provide additional support for the confidence seen in the chicken market.

On the grain front, prices have settle back in recent weeks as the prospects of bumper U.S. corn and soybean crops and abundant crop production out of South America have eased speculator activity.

Analyst agree Tyson will report healthy profits in its chicken segment and it will be needed to offset lackluster results likely in pork and beef. Tyson, while a iconic name in chicken, depends heavily on its beef segment for its gross profits as beef represents more than 40% of the company’s total revenue each year and typically carries a higher overall profit margin relative to chicken and pork.

Sterling Beef Profit Tracker reports that pork packer margins have been in the red for much of the quarter.

Steve Kay, publisher of Cattle Buyers Weekly, said recently that packers like Tyson will see some pork profits in the quarter because of their extensive value-added bacon, ham and lunch meat business in the retail segment, which gives them a thicker cushion against the wholesale commodity prices.

Beef packer margins averaged between $65 and $79 per head through the recent quarter, having turned positive after being in the red for the first several months of this year.

Jim Lochner, chief operating officer for Tyson Foods, said in May that the overall demand and consumption for beef is down amid the higher prices, relative to chicken and pork.

In the previous quarter, Tyson incurred a net operating loss of $26 million in its beef segment. It was the worst second quarter since 2007. But, Lochner told analysts that the beef segment should remain positive for rest of this fiscal year, although he expects results below the normalized growth range of 2.5% to 4.5%.

INVESTOR PAYDAY
Tyson shareholders have seen a 99% gain in the stock price over the past year. Shares were trading just above $28 a share in Friday’s morning session (Aug. 2). Analysts remain somewhat bullish on Tyson, despite the lofty gains this year.

The analysts peg the one-year target price for Tyson Foods at $30.36, which is not a tremendous upside from current levels.

There has also been some investor speculation with Tyson Foods, given that one of its competitors Smithfield Foods is in the process of being acquired by a massive meat player in China.

Tyson’s primary poultry competitor, Pilgrim’s Pride, was acquired by Brazilian beef giant JBS in recent years

In November 2011, Fort Smith-based O.K. Industries was acquired by Industrias Bachoco. Combined, Industrias Bachoco and O.K. Industries is now the third largest chicken producer in North America, behind Tyson and Pilgrim’s.

Unlike Pilgrim’s and Smithfield, Tyson has a dual-class stock system that gives the Tyson Family control over any potential takeover.

Insiders don’t see Tyson as takeover candidate and the company is already spreading its own wings throughout China and Latin America. And with its cash holdings and relatively healthy balance sheet, it’s more likely that Tyson would be the one shopping for a potential acquisition.