Second quarter income up almost 40% for Tyson Foods, company raises full-year earnings guidance (Updated)

Editor’s note: Story updated with additions and changes throughout.

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Continued growth in prepared foods and improved beef numbers helped Tyson Foods post a better-than-expected second fiscal quarter net income of $432 million, up almost 40% compared to the $310 million posted in the same quarter of last year.

The unadjusted per share net income of $1.07 beat the consensus estimate of 96 cents per share. The strong second quarter follows a first quarter in which net income of $461 million was up 49%.

Total revenue during the quarter was $9.17 billion, down 8.1% compared to the same quarter last year, but better than the consensus estimate of $9.04 billion.

“Our business continues to perform very well, delivering record second quarter operating income and return on sales, in what is typically the most challenging quarter of our fiscal year,” Donnie Smith, president and CEO of Tyson Foods, said in the earnings statement.

The company also raised its full year earnings guidance from $3.85-$3.95 per share to $4.20-4.30 per share and expects sales of $37 billion this year. Revenue is expected to decrease year-over-year because of lower meat prices.

“We’re in a great position, and we’re generating momentum that will take us into 2017 and beyond. We’ve produced record results in the first half of the fiscal year, and we expect continued strong performance in the second half. To reflect what we’ve accomplished and to demonstrate our confidence, we’re raising adjusted earnings guidance for fiscal 2016 to $4.20-4.30 per share,” Smith noted in the report.

Wall Street largely approved of the earnings outlook as Tyson shares (NYSE:TSN) rallied to a new 52-week intraday high of $70.44 on the earnings announcement before sliding back to close at $68.24, up 99 cents. For the past 52 weeks the share price has ranged from the high set earlier in the day to a low of $39.05.

“We thought Tyson Foods paid too much for Hillshire Brands, but that premium is paying off. Tyson paid up to move from a commodity company to proprietary company with much higher margins and stronger growth potential longterm,” said Jim Cramer, CNBC Mad Money host.

Cramer said Hormel did it first and now Tyson Foods has followed that model which should lead to greater earnings potential. That echoes what Smith has been saying since Day 1 of the Hillshire acquisition and that’s still his stance today.

Net income for the first six months of the fiscal year totaled $893 million, better than the $619 million in the same period of 2015. Revenue for the six months was $18.322 billion, down from the $20.796 billion in the same period of 2015.

Tyson Foods’ four segments posted operating income gains for the quarter with the chicken segment posted the largest percentage gain (12.7%).

• Chicken segment
Operating income in the quarter was $347 million, up 12.7% compared to $332 million in the same quarter of 2015.

More demand for chicken and lower feed costs helped boost margins in the segment. Feed costs were down $80 million in the quarter, and are down $140 million for the first six months of the fiscal year.

But the biggest story around chicken is that Tyson has managed to increase its operating margin to more than 12% for this fiscal year and has raised the normalized margin range up from 5% a few years ago to more than 11% today. The operating margin refers to the spread between sale prices and raw materials / production costs. In the past four year Tyson has doubled its operating margin which is a positive sign to analysts.

Sales in the segment totaled $2.737 billion, down from the $2.829 billion in the same quarter of 2015. Tyson’s divestitures of chicken businesses in Mexico and Brazil are one reason chicken sales are down. Tyson said domestic demand remains strong for fresh chicken at retail and in food service.

• Beef segment
The beef segment saw a big shift from a $20 million loss in the 2015 quarter to a $46 million operating income in the second quarter. Growing demand, more cattle in the supply chain and an increase in cattle processed help turn the segment toward profitability.

Smith said he would just as soon forget last year’s beef results and he’s confident the worst of the beef challenges are in the past. He said Tyson is looking at a 2% increase of supplies of fed cattle over the next two years and cattle futures have become less volatile in recent weeks which is also a good sign.

Smith also said with the lower cutout beef prices more retailers are featuring beef which resulted in strong beef sales in February, which is typically one of the weakest for beef. He expects retailers will continue to feature beef through Memorial Day.

Tim Ramey, analyst with Pivotal Research, said some of the best news in the earnings report was the turnaround in beef, despite the low 1.5% to 3% operating margin range provided by Tyson Foods.

Segment sales totaled $3.639 billion, down from $4.13 billion during the same quarter of 2015. The lower sales relate to fewer exports and lower overall beef prices from a year ago.

• Pork segment
Operating income in the pork segment was $140 million in the quarter, well ahead of the $99 million in the same quarter of 2015. The company said better “plant utilization” and lower live hog costs boosted margins in the quarter.

Sales in the segment totaled $1.19 billion, below the $1.204 billion in the same quarter of 2015.

• Prepared foods
The segment, which includes products from the Hillshire Brands acquisition, posted operating income of $197 million, up from the $160 million in the same quarter of 2015. Half of the Prepared Foods business is food service and half is retail.

“For the six months of fiscal 2016, Prepared Foods was positively impacted by $206 million in synergies, of which $81 million was incremental synergies in fiscal 2016 above the $125 million of synergies realized in the six months of fiscal 2015. The positive impact of these synergies to operating income were partially offset with heavy investments in innovation, new product launches and the strengthening of our brands,” the company noted in the earnings report.

Segment sales reached $1.804 billion, below the $1.871 billion in the same quarter of 2015.

• International
Tyson Foods has moved its international sales into the “Other” business category for reporting purposes. That category also involves any forward buying contracts used by the company to lock in pricing amid volatile market swings. Tyson reported an operating loss of $26 million in the second quarter, compared to a $24 million loss a year ago. For the full six months, operating losses were $44 million, down from $53 million in losses reported in the same six-month period a year ago.

Smith said Tyson will stay committed in China over the long haul as it tries to transition that business from supplying food service into one that more closely resembles a branded retail fresh chicken business like it has in the U.S. He said chicken demand is soft as is pricing in China, despite rising pork prices.

He said the business in India is very small, but Tyson also is committed to growing that market.

Revenue generated by Tyson Foods international ventures totaled $86 million in the second quarter, down from $222 million a year ago – a decline courtesy of divestitures in Mexico and Brazil. Excluding the divestitures, Tyson said the sales volume was up 0.4% in the first six months of fiscal 2016.

Smith also told analysts during the earnings call that Tyson is always looking for possible acquisitions to grow the business, but admitted there hasn’t been anything domestically or internationally of interest.

The company also on Monday announced a 15 cent per share dividend on its Class A stock and a 13.5 cent per share dividend on its Class B shares. The dividend is payable Sept. 15 to shareholders of record on Sept. 1.