Wall Street expects 38% earnings growth for Tyson Foods, despite 9% drop in revenue

Before the market opens Monday (May 9), Tyson Foods is expected to post $403 million in net income for the second quarter of fiscal 2016 which ended. That equates to a Wall Street consensus of $1.03 per share, up 38% over the 75 cents per share reported in the same quarter of 2015.

The company posted net income of $313 million in the year-ago period.

While bottom line profits are expected to rally, the company’s top line revenue is forecast at $9.04 billion, falling 9.4% from the $9.98 billion the company had a year ago. The overall sales dip could be related to weaker export values on beef and pork, and the surplus of chicken on the market which is pressuring wholesale poultry prices.

Recent U.S. exports for the quarter ending March 31 showed a 13% drop in beef export values, despite the 2% gain in volume from a year ago. Steve Kay, publisher of Cattle Buyers Weekly, said there were record high wholesale beef prices in the quarter coupled with the strong dollar. He said U.S. pork exports were down 9% on value even though total volume was up 2%.

That said, Kay expects Tyson Foods to make plenty of money in the quarter in its beef, pork and chicken operations. He said beef packers had strong margins in January and they held on pretty good through February and March. He said with cattle supplies now forecast to peak at 96 million head by 2019  there is light at the end of what has been a long tunnel as the industry worked to rebuild the herd. Kay said wholesale beef prices have come down in recent weeks and consumers took advantage of heavy promotions at the retail beef case. He expects that will continue through Memorial Day which is great for steak lovers.

“American beef lovers are going to see the most attractive prices on beef on since the Great Recession,” Kay told Talk Business & Politics. “That will of course depend on retailer promotions, which could be very aggressive on higher quality cuts like rib-eyes and other steaks.”

Analysts expect Tyson Foods to report operating income of roughly $686 million in the quarter. Beef could see an operating profit of $34 million which would be about a 1% operating margin relative to sales. That compares to a $20 million loss a year ago.

The chicken segment is expected to have an improved operating profit of $360 million with an estimated 13.5% operating margin for the quarter. A year ago Tyson reported $332 million in operating profit with an 11.7% margin.

The pork segment is expected to have operating income of $120 million, compared to $99 million a year ago. The operating margin as a percent of sales has improved from 8.2% to an expected 12%.

The company’s international sales are likely to be lower given they no longer have a presence in Mexico or Brazil. The company is expected to report an $18 million loss in its international division, which is flat with the previous quarter and up slightly from the $15 million loss reported a year ago.

Kay said the synergies with Hillshire Brands continue to help bolster the value of Tyson Foods. He said Tyson is really just getting started and a vast number of Wall Street Analysts agree.

“Tyson’s purchase of Hillshire Brands is turning out to be a master stroke. They did not overpay for Hillshire as once thought by some Wall Street analysts. One major benefit to Tyson Foods in their transformation into a food company from a meat packer has been the higher further-processed margins of 10% or better, compared to the typical 2% to 3% packer margins,” Kay said.

In the last 60 days, three financial analysts revised their earnings estimates upward for the quarter. In that same time, no analysts have revised estimates lower. Tyson Foods shares have “buy” ratings from 55% of analysts polled by MarketRealist, while 45% rate the company a hold. None of the analysts rate Tyson Foods a sell.

Tyson shares (NYSE: TSN) closed Thursday (May 5) at $66.38 per share, down 31 cents. For the past 52-weeks the shares have traded between $68.84 and $39.05. MarketRealist analysts have a one-year target price of $72.56.