Springdale-based Tyson Foods is expected to put up strong fiscal first-quarter profits when it reports earnings ahead of the market opening on Monday (Feb. 6). The results are expected to exceed last year’s profits, but fall short on the revenue side.
Wall Street consensus pegs net income per share at $1.26, up 9.5% from a year ago. A few analysts forecast the earnings per share to be as high as $1.38, but there are some pessimists who see profits declining from a year ago. If the consensus earnings are reached, that would add about $450.73 million to the company coffers, with gross revenue of about $9.04 billion, falling from $9.15 billion in the year-ago period.
Stephens Inc. analyst Farha Aslam recently increased her first-quarter estimate to $1.30 per share, citing strong beef profits for the period ending Dec. 31. She said declining cattle prices in that period, coupled with strong U.S. demand for beef, could double the beef operating income from a year ago. (Stephens does investment banking services for Tyson Foods and is compensated for that work.)
Analysts with HedgersEdge said in Tyson Foods’ first quarter, (October to December), beef packer margins stayed positive, reaching a high of $147.20 per head before tailing off as the year ended. For the full-year, beef packer margins averaged $43.49 per head, the best year going back to 1990.
Heather Jones, an analyst with Vertical Group, noted beef profits were strong in Tyson Foods’ first quarter, but she’s more cautious on the next quarter or two, given packer margins have moved into negative territory with losses of nearly $83 per head in late January. The Sterling Beef Profit Tracker pegs packer losses the first week of February to be about $48 per every head processed as wholesale beef cutout prices fell by 50 cents a pound while cattle prices rose $2 per hundredweight.
Analysts say in the quarter ending Dec. 31, Tyson Foods will likely see beef operating income as high as $140 million, which is about double the $71 million reported a year ago. But they also note the beef segment is not having a good run in the second quarter, and there are concerns of rising cattle futures and now somewhat tepid demand for beef that continues to squeeze packer margins. For that reason, Jones downgraded Tyson Foods to a “hold” position from her previous “buy” rating.
Beef profits will be strong for the second quarter and so will pork. Aslam said Tyson Foods has also experienced recent operating gains in its pork segment behind healthy domestic demand as well as improving exports. Pork packers have seen positive margins, and Tyson Foods’ pork business is in branded products, which creates higher overall profit margins. Steve Kay, publisher of trade magazine Cattle Buyers Weekly, has said Tyson Foods runs a very lean pork business, with good margins year in and year out. Aslam expects the company’s pork division to see operating profits of around $202 million, which would be a 29% jump from a year ago.
While Aslam expects strong beef and pork returns, she’s not as optimistic about Tyson Foods’ chicken segment. She expects chicken operating income to drop 12% to about $316 million for the quarter. She expects there could be some hangover from the chicken segment’s decline in the fourth quarter, when the company failed to accurately align its production with demand. Aslam is bullish on Tyson Foods in the long-term, and she raised her full-year guidance to $4.90 in light of the overall strong start to fiscal 2017.
Tyson Foods management said recently that the company’s chicken and prepared food divisions have returned to normalized operating margin between 9% and 11%. The prepared food segment — which involves each of the other proteins as well as the core of Hillshire Brands business — is also expected to post solid results in the quarter. Under the direction of new CEO Tom Hayes, Tyson Foods is expected to continue its transformation away from the low-margin commodity business. Monday’s earnings call will be the first opportunity some analysts have had to question Hayes on his plans for growing revenue in what has been a challenging area for Tyson Foods in the past two years, because of deflationary prices.
Overall, investors have been a little bearish on Tyson Foods. Morningstar analyst Zain Akbari notes Pilgrim’s Pride, a competitor to Tyson Foods, is likely a better bet for the near to midterm. He said Pilgrim’s has tremendous opportunities in its Mexican poultry business, an area that Tyson Foods got out of in recent years by selling its business to Pilgrim’s.
Tyson Foods shares have fallen from grace over the past six months, trending around a high near $77 in September down to the $56 range in early December. Since then, shares have rebounded a bit, closing Thursday (Feb. 2) at $65.18, up 1.37%. For the past 52 weeks, Tyson Foods shares have ranged in price from a high of $77.05 to a low of $51.73. Analysts give Tyson Foods a target price of $70.50 over the next year.