Tyson Foods forecasts record results in 2016 and 2017 despite lower meat prices

With three quarters of fiscal 2016 already in the books, officials with Springdale-based Tyson Foods are optimistic that net income will set a new record even with lower revenue.

It’s been two years since Tyson Foods acquired Hillshire Brands and the integration is complete. Earnings are expected to increase another 40% this year with projected revenue of $37 billion, lower than the $41 billion reported last year. Revenue continues to trend lower thanks to chicken, pork and beef prices falling an average of 7% from a year ago.

Fiscal third quarter net income for Tyson Foods totaled $484 million – up 41% –  and the company posted $9.403 billion in revenue. The company’s net income for the first nine months of its fiscal year is up 43%.

Company executives said Monday (Aug. 8) that while top line revenue is lower, bottom line profits increase as each of its operating segments are running at or above their normal ranges. For the remainder of 2016 the company expects its chicken segment to operate at 12% profit margins, while the pork margins remain above 10%. The prepared food business has improved significantly in recent quarters and is now on track with normalized margins of 10%-12%. The beef segment is also back within the normalized 1.5%-3% margin with brighter days ahead.

The company’s international business which is lumped into its “other” segment is projected to have a $90 million operating loss for the full year of fiscal 2016. This business is hurt from the weak market in China, where the company continues to invest in transforming that business from a foodservice base to a consumer base.

Tyson Foods CEO Donnie Smith said the company recently hired new management in China but the dynamics there are difficult. He said grain costs are higher and the wholesale market remains soft – weaker than he anticipated. He said Tyson remains committed to that market but it’s a long-term play.

FISCAL EXPECTATIONS
For the full fiscal year 2016, Tyson management expects to earn between $4.40 and $4.50 per share, which would be a 40% improvement over the record 2015 results.

Looking ahead to fiscal 2017, which officially begins October 1, Tyson Chief Financial Officer Dennis Leatherby said investors can expect more growth, increased capital investment and ongoing debt reduction. Fiscal 2017 revenue is expected to improve 1% to $37.37 billion, which is still below the fiscal 2015 record.

The company expects beef, chicken, pork and turkey supplies will increase about 2%-3% in fiscal 2017 to accommodate demand and some export growth. Synergies (savings and efficiencies) are expected to top $700 million in fiscal 2017 from the Hillshire Brands acquisition.

Chicken has been a shining star segment for Tyson Foods in recent years and there is no reason to expect less in 2017, company executives said. The company expects to realize $175 million in savings on grain this year compared to last. They also expect stable grain costs in 2017. The pork and beef markets appear to be running smooth with adequate supplies of animals to slaughter and stable demand for the processed meats they sell.

The secret sauce to Tyson Food’s growth strategy is in its prepared foods segment, which is a diverse business expected to benefit the most from the Hillshire Brands acquisition. A hurdle the segment experienced in recent months was price depreciation in some of its key brands such as lunchmeat and other deli items. Tyson said they expect to save $240 million this year in lower raw material costs which is a plus in helping the margins normalize. This segment is also involved in new product launches and ongoing innovation which requires adequate research and marketing funds.

MONEY TO SPEND?
Tyson is spending $725 million this year in capital expenditures with a slight increase to that expected for 2017. Net interest expense will be $245 million this year and around $225 million in fiscal 2017. Tyson continues to generate strong cash flow and maintains a minimum liquid target of $1.2 billion in free cash. As of July 2, cash liquidity was $1.3 billion.

Given the rather seamless integration of Hillshire Brands into Tyson Foods and strong financial position Tim Ramey, analyst with Pivotal Research Group, asked about possible merger and acquisition targets.

Leatherby said Tyson’s merger and acquisition strategy is about finding the right strategic fit.

“I think the good thing about what’s going on with our strong cash flow and our deleveraging, even though we’re largely keeping debt flat since March, is that our debt capacity has expanded to the point where we could easily do a Hillshire-size acquisition so long as it’s at the right price, we can create the right synergies and generate the right returns. So we’re really in good shape there,” Leatherby said speaking of Tyson’s capacity to fund another acquisition.

Tyson management did say it would continue repurchasing shares as a way to increase shareholder value. In the past 12 months Tyson has repurchased 31 million shares for $1.8 billion, or $56 per average share. Included in that amount was 6.6 million shares for $424 million in third quarter and another 5 million shares for $380 million so far in the fourth quarter.

Despite the aggressive buyback strategy investors viewed Monday’s strong earnings report and forecast as lukewarm with Tyson Foods shares (NYSE: TSN) closing at $74.07, up 43 cents on the day.

The stock has already been on a strong upward trend this calendar year. Since Jan. 1 the share price has risen from $52.96, or nearly 40%. For the past 52 weeks Tyson shares have ranged from $39.05 to $75.50.