Tyson Foods expected to post healthy quarterly profit even with possible 7.4% revenue drop

Wall Street expects a hefty payday from Tyson Foods when it reports fiscal third quarter earnings on Monday (Aug. 8). The consensus estimate of analysts following the company is $1.07 per share, up almost 34% compared to the 80 cents per-share reported earnings last year.

Based on the number of outstanding shares of Tyson Foods analysts expect net income in the quarter to reach $404 million, up 17.7% from a year ago. The percentage difference in estimated net income and estimated per share income results from the difference in the number of outstanding shares in the two quarters.

The company has been aggressively buying back shares, which reduces the number of outstanding shares. Speaking at Tyson Foods’ second quarter call Tyson Foods Chief Financial Officer Dennis Leatherby said the company repurchased 6.9 million shares for $400 million in the second quarter.

“So far during the third quarter of this year, we repurchased approximately 3 million shares for $200 million. In total, over the past 10 months, we have now repurchased over 22 million shares for approximately $1.1 billion, underscoring our commitment to continue returning cash to shareholders,” Leatherby said.

BETTER BEEF MARGINS EXPECTED
While stronger earnings are expected, revenue projections of $9.33 billion are down 7.4% from a year ago in the quarter ending June 30.

Analysts say Tyson Foods is clicking on nearly all of its cylinders as the chicken segment is projected to see nice returns, the pork business has likely been steady and beef margins were among the strongest on record for the quarter.

One of the wildcards in Tyson’s portfolio has been its large beef segment. But Steve Kay, publisher of Cattle Buyers Weekly, told Talk Business & Politics he expects Tyson’s beef segment to record as much as $140 million in operating revenue which would be about three times that of the second quarter and twice that of the fiscal first quarter.

Kay said wholesale beef prices are down 15% from a year ago and have allowed retailers to do more beef promotions and in return have kept consumer demand high for beef. He said the industry was also able to kill about 5% more cattle and the increased slaughter numbers helped packers run at higher capacity rates and post better margins.

CHICKEN SEGMENT PRESSURES
The chicken segment has run at profitable rates given lower feed costs and stable demand from food service and consumers. Some analysts have raised concern over food service contracts which are typically up for renegotiation in the fall. Tyson Foods has a large foodservice business which is roughly 31% of the company’s total annual sales.

As corn prices have dropped to levels not seen since 2006, some analysts think foodservice customers will push for better pricing which could further depress revenue in the months ahead. A recent Watt Agri report indicates that foodservice buyers are fixated on the cost differences from 2014 to 2015 as well the changes in the last year. With only minor price adjustments in the past, foodservice buyers are eager to make up for adjustments they believe have occurred between the 2015 and 2016 contracts.

Grain costs this summer were 50 cents a pound below 2015 and $1 below 2014. Estimates are that feed costs per a live 5.4 pound bird has decreased to around 90 cents a pound. A year ago feed costs were about $1 per pound.

Tyson Foods continues to be favored on Wall Street as a diversified food company with the ability to generate healthy cash flow with opportunities for growth via its prepared foods segment and the continued assimilation of Hillshire Brands. Jeffries recently raised its target price to $80 and maintained its “buy” rating on the stock. BMO Capital, downgraded Tyson Foods to “market perform” on June 6.

Kay said the acquisition of Hillshire Brands was a game-changer for Tyson Foods and he agreed the share price may be somewhat high at $73.56, where it closed on Thursday (Aug. 4). The consensus target price for Tyson shares (NYSE: TSN) is $78.20. Over the past 52 weeks the share price has ranged from $39.05 to $74.86.