Bird flu and volatile beef markets shouldn’t dampen Tyson Foods’ profits

While Avian Influenza dominated headlines and packer margins ran in the red in recent weeks they are not expected to put a dent in Tyson Foods’ profits. The company is set to report fiscal second quarter earnings on Monday (May 4), before the equity markets open.

The Springdale-based meat giant is expected to pocket between $292 million and $299 million in net income for the quarter ending March 31, according Wall Street analysts. These profits compare to $213 million earned in the year-ago period. The net income per share is expected to be 72 cents, up from 60 cents reported a year ago.

Combined revenues from Tyson and Hillshire Brands are expected to top $10.11 billion, up 11.9% over the $9.03 billion reported by Tyson Foods last year ahead of the merger. Tyson acquired Hillshire in an $8.5 billion deal completed in August 2014.

Shareholders of Tyson Foods have not fared so well this year with the stock price down about 1% to date. Shares of Tyson Foods closed Thursday (April 30) at $39.50, up 29 cents. The high price for the stock over the last 52-weeks is $44, and the low of $34.90 was reached June 16, 2014.

Wall Street analysts do see some upside potential in the meat company with a one-year target price of $50.25.

BIG CHICKEN
Tyson Foods chicken segment is expected to post good results despite softness in export markets relating to recent outbreaks of Avian Influenza. Analysts say despite some challenges, the overall pricing for chicken has been strong in recent months thanks to consumer demand.

Pilgrim’s Pride, a major competitor to Tyson Foods, reported earnings on Thursday (April 30) of 82 cents a share, rallying from 39 cents a year ago. Pilgrim’s CEO Bill Lovette told the media the chicken industry is running at almost full capacity and can barely stay up with demand.

The sale of Tyson’s Mexican poultry operation to Pilgrim’s has not been completed as the companies await a final decision from Mexican antitrust authorities. The company expect the deal will close in the next quarter.

Some of the issues helping support chicken prices include limited supply given an older age breeding flock and heightened food-service and consumer demand as chicken remains a value compared to beef and pork.

Stable corn and soybean prices are also helping boost margin spreads for chicken processors. Tyson expects feed costs to be $400 million less this year than last.

The U.S. Department of Agriculture has reported chicken production is growing slightly ahead of its forecasted projections, not by number of head, but by overall weights. There are more larger birds in production than smaller birds, but the industry is working to increase the smaller bird production which is now running at full capacity.

Credit Suisse analyst Robert Moskow said Tyson expects its chicken margin to be 11% for the duration of this year with solid profits in the second quarter, and building higher through the summer months.

LEANER BEEF
In the beef segment, Tyson Foods is expected to report weaker results than a year ago given that packer margins have been up and down dramatically in recent months. Tyson has held back slaughter as demand is tepid across the board for beef.

In the first quarter of 2015, which corresponds with Tyson Foods’ second quarter, beef prices increased by 13.48% and per capita consumption increased slightly (0.01%) compared to 2014 levels, according to analysts with Kansas State University.

Looking ahead, beef processing margins have improved significantly since late March. If wholesale prices start to stabilize and retail demand becomes more evident, as it should seasonally, greater packer appetite of a larger serving of feedlot cattle could easily be triggered, according to DTN livestock analyst John Harington.

PORK AND PREPARED FOODS
Tyson is expected to report decent pork results despite near negative margins off and on throughout the quarter. Analysts said Tyson runs aN efficient pork business with mostly branded products that carry higher margins. Tyson said its pork margins for the quarter should range between 6% and 8%.

The pork segment will no doubt be helped by the presence of Hillshire Brands as will the Prepared Foods segment which is smallest of the four segments at Tyson Foods.

Moskow said Tyson expects the operating margin for this combined business to be "in excess of 6%." In fiscal 2015 the company expects to realize more than $225 million of synergies from the acquisition.

He said Tyson believes the improved portfolio and innovation will partially offset increased raw material input costs. Moskow forecast a 6.5% margin for the Prepared Food segment. He said raw material costs are expected to be $140 million in the recent quarter, which could weigh down net profits a bit. Moskow believes Tyson will make up some ground in the back half of the year in this segment.