Tyson Foods has been in the beef business 14 years since its $3.2 billion purchase in June 2001 of IBP, a privately held meatpacker. After that deal, beef has comprised the largest percentage of Tyson Foods’ sales, and in many of the years, the profits too.
That is not this case this year as beef profits are much harder to come by amid record high live cattle and beef prices. Through three quarters of fiscal 2015, Tyson’s beef sales have totaled $12.826 billion, which is nearly 42% of the company’s total revenue. A year ago beef sales were $11.748 billion, or 43% of the company’s total revenue.
While beef fattens top line sales, the bottom line operating profits tell another story. In that same nine-month period Tyson’s beef segment lost $33 million with a net operating margin being a 0.2% loss.
Tyson’s total operating income through three quarters of this year was $1.619 billion. The bulk of that – $996 million – came from the company’s chicken segment, which had an operating margin of 11%.
Given the meat giant’s recent $8.5 billion acquisition of Hillshire Brands and efforts to transform the business into a higher margin, branded foods company and away from commodity-based proteins, CEO Donnie Smith was asked during Monday’s (Aug. 3) media call if there is any talk of the company divesting its beef business.
Competitor Cargill recently sold its pork business for $1.45 billon to Brazil’s JBS, a global meat packer that also owns Pilgrim’s Pride Chicken. Smith had no commentary on the Cargill, JBS deal, and he said Tyson has no plans to sell its beef business. In fact, he told analysts that the challenging operational metics in the beef business are temporary at best.
He said softer economies in Asia have been problematic for beef exports that were held up by the West Coast port backlog. In the recent quarter he said Tyson Foods suffered an $84 million hit when one beef customer abroad could not take their order. The products were sold in other markets and used for hamburger at a much lower value.
Smith also said given the record high live cattle prices, Tyson operates beef slaughter and packing plants fewer hours each week and this will continue until there is a reduction in live cattle prices.
Cattle prices are directly related to fewer cattle supplies as packers can’t slaughter what they don’t have. So far in 2015, beef cow slaughter is down 17.3%, according to Glen Selk, cattle marketing specialist at Oklahoma State University. He said beef cow slaughter will be down year-over-year and is likely to result in a near record low 2015 net culling rate below 8%. The July Cattle report indicates a 2.5% year-over-year increase in beef cows to mid-year 2015. Historical relationships between the estimated July beef cow inventory and the following Jan. 1 inventory suggest a January 2016 beef cow inventory of just over 30 million head, representing a little more than 1% growth in 2015, according to Selk.
Tyson reported increased live cattle costs of $215 million in the recent quarter, compared to a year ago. For the nine-month period, live cattle costs escalated by $1.4 billion for Tyson Foods.
“It’s not a quick fix, but we believe we can manage these acute issues in beef. We believe in the long-term viability of our beef business,” Smith told the media.
The company also continues to reward shareholders. The company announced Tuesday a dividend of 10 cents per share on Class A common stock and 9 cents per share on Class B common stock. The dividend is payable on Dec. 15, to shareholders of record at the close of business on Dec. 1.
Tyson shareholders gained back some of what was lost following Tyson Foods third quarter earnings release on Monday (Aug. 3). Shares (NYSE: TSN) closed Tuesday at $41.58, up $1.62, or 4.05% on the day. There were 14.493 million shares trading hands on Tuesday which is more than three times the daily average volume, according to Yahoo! Finance. During the past 52 weeks the share price has ranged from a $45.10 high to a $36.12 low.