Wall Street expects leaner second quarter earnings for Tyson Foods

Equity analysts predict that Tyson Foods will pocket roughly $374 million, or $1.02 per share, for the second quarter, below the $432 million earned a year ago. The Springdale-based meat giant reports financial results ahead of the market opening on Monday (May 8).

Revenue is expected to be $9.05 billion for the quarter, down from $9.17 billion a year ago. The softer revenue relates to lower meat prices amid more supply relative to demand. While net income will be a little shy of that earned last year, all three of the company’s protein segments are doing well.

Poultry, still a huge business for Tyson Foods, is in the money. Poultry economist Paul Aho described the climate as a “sweet spot” for chicken processors, saying that demand is about as good as it can get. Tyson’s chicken margins are also good thanks to manageable grain costs. Tyson Foods CEO Tom Hayes said he expects to grow the company’s fresh and frozen chicken sales volumes. He said chicken prices are soft because of competitive pressures and that scenario won’t soon abate. Hayes also reiterated Tyson’s strategy to grow the whole birds needed, but to aggressively buy parts as needed to fill food service orders. He warned the second quarter would be softest for chicken sales for the year, despite operating margins between 9% and 11%.

The beef segment is expected to report positive results building on the record first quarter Tyson reported in February. Operating margins are expected by a high 5%.

‘MEAT TREAT’
Steve Kay, publisher of Cattle Buyers Weekly, said recent trends are setting up to be a blockbuster year for the U.S. meat industry. He said adequate beef supplies have meant lower retail pricing and consumers have responded by eating more steak and burgers. He expects this will continue throug the summer grilling season.

He said the pork industry is also doing well and expects processors like Tyson to have another highly profitable year, surpassing last year’s records in many cases. Tyson expects its pork operating margin to be 12% this year.

With more supplies or beef and pork on the market, Kay said poultry processors will have to find ways to add value to the chicken. He said consumers last year reduced chicken consumption because beef and pork prices were comparable at times. This year he expects beef to remain the “meat treat” and chicken to be “survival food” in consumer’s minds.

One area that remains challenging for Tyson Foods is the prepared foods segment. Talk Business & Politics recently asked Hayes to explain challenges in the segment considered the growth engine for the company. Hayes said in the last quarter the company saw supply challenges for key products such as pizza toppings sold into food service. He said the company closed an old plant in Jefferson, Wisc., and moved production elsewhere.

“We had some issues right out of the gate with the new production with quality and service and we are still wrestling with the impacts of that. It has brought down the total prepared foods margin. But the retail business has continued to do extraordinarily well,” Hayes said.

DIGESTING ADVANCEPIERRE
The recent acquisition of AdvancePierre Foods is seen as a way to help Tyson accelerate its prepared foods segment, according to Stephens Inc. Analyst Farha Aslam. She said the deal could help Tyson recover its margins in the laggard prepared foods segment. She also sees stronger exports as a positive for the meat giant. That said, Aslam reduced her annual earnings estimate from $5 per share to to $4.97, citing the timing of the AdvancePierre acquisition.

Kenneth Zaslow, analyst at BMO Capital Markets, said the AdvancePierre purchase is “strategically and financially sound,” and accretive to Tyson’s long-term growth. He said AdvancePierre’s customer-centric business model should continue to generate above-industry volume growth, especially in foodservice and alternative channels.

Moody’s recently affirmed Tyson’s credit ratings above investment grade following the $4.6 billion it is spending to acquire AdvancePierre. Moody’s said the proposed mostly debt-financed acquisition has positive and negative credit elements. The Baa2 rating on Tyson Food’s long term debt is deemed to be medium-grade and subject to moderate credit risk, according to Moody’s. The short-term rating of Prime 2 demonstrates the debtor’s strong ability to repay short-term debt obligations. Moody’s also gave Tyson an outlook rating of “stable”

Moody’s said Tyson’s increase in financial leverage could result from the acquisition. There is also the potential for integration or operating disruptions at AdvancePierre that could cause financial leverage to remain high over the next year. Moody’s said the risks are balanced against significant merits of the transaction, including the $200 million of cost synergies Tyson could achieve by 2020.

Shares of Tyson Foods (NYSE: TSN) closed Wednesday at $62.65, down 58 cents. For the past 52 weeks the share price has ranged from a low of $55.72 to a $77.05 high. Since Jan. 1 shares have traded as low as $61.21 (Jan. 10) and as high as $65.39 (April 24).