Record fiscal year earnings expected from Tyson Foods

Tyson Foods is having another record year as its chicken, beef and pork segments are well into the black and improvements continue on the turnaround of the meat giant’s prepared foods division. Tyson Foods reports fourth quarter and fiscal 2017 earnings early Monday (Nov. 13).

Profits are expected to be $494 million for the fourth quarter ending Sept. 30, or about $1.35 per share, according to the consensus estimate of 12 Wall Street analysts. A year ago, Tyson earned $392 million, or 96 cents per share. Profits are expected to be up 26% over the past year. Revenue is expected to be $9.16 billion, up 7% year-over-year.

For the full year, Wall Street expects Tyson will earn $5.21 per share or $1.9 billion in net income, up from $1.768 billion added to the company coffers last year. Tyson is looking at record earnings, while revenue is expected to be $38 billion, up 3.1% from last year but still below the company’s record of $41.373 billion set in fiscal 2015. The 2017 sales will include about $1 billion of incremental growth from the AdvancePierre acquisition completed this year.

It’s been a year since Tyson Foods announced CEO changes with Donnie Smith’s retirement and Tom Hayes taking the reins as CEO on Jan. 1. Hayes has since made several changes to the company’s corporate structure, most recently eliminating 450 corporate office jobs.

In late September, Hayes said the company is at a “time of transformation” and management is focused on “financial fitness” with reducing overhead costs as an area the company is examining. Procurement and supply chain are also areas he says synergies can take place given the acquisitions made by Tyson in the past few years.

“We made sure we have really tight corporate centers that focus on enabling the business growth in the future. We are not done. We have opportunities in manufacturing that still have not been done,” Hayes said in late September.

Wall Street has applauded Hayes’ move to reduce headcount and provide more transparency into the company’s expectations for 2018. Over the past five weeks, Wall Street raised its consensus earnings estimate for the fourth quarter and the company’s target price which is now $76.77.

PROTEIN POWER
The basis for the higher earnings stem largely from the positive operating conditions in the meat protein segment. U.S. chicken processors are seeing healthy margins this year helped by the lowest feed costs in a decade. Breast, wing and dark meat prices also remain high thanks to an uptick in per capita consumption.

Hayes said even when boneless, skinless breast meat prices soften as they did in the recent quarter, Tyson is poised to make more money because its higher margin prepared foods business procures chicken from the poultry segment. He said the chicken business is strong and the company will continue its buy-versus-grow strategy.

Tyson’s beef and pork businesses are also making solid profits. Each of these businesses involve Tyson procuring the live cattle and hogs then slaughtering and processing the meats for customers which range from retail grocers to wholesale food service. Sterling Marketing President John Nalivka estimated beef packers would make an average of $107 per head in 2017. For much of Tyson’s fourth quarter that margin ranged between $120 and $163 per head, according to Sterling Beef Profit Tracker. Pork processing margins for the full year are expected to be $22.50 per head for packers. Analysts said Tyson likely did better than that given the company’s high margin retail bacon and sausage businesses.

Hayes also said recently the company’s meat processing businesses provide a lot of cash liquidity that can be invested in higher margin growth opportunities which includes acquisitions. He said revenue will be $38 billion in 2017 rising to $43 billion next year and all of the company’s operating segments will see improvements in their margins.

ANALYST OPINIONS
KeyBanc Capital Markets recently gave the food giant an “Overweight” rating with a price target of $82. KeyBanc analyst David Carlson believes Tyson will post above-average sales volume as well as produce steady earnings growth over the next three years. He also points to the incremental $400 million in cost savings the company recently announced that he believes is not reflected in the stock price.

Carlson said he’s confident Tyson will achieve the full amount of those cost savings, potentially faster than expected over the next three years. He said the AdvancePierre acquisition could help Tyson generate meaningful long-term earnings per share growth, possibly as high as 50 cents per share.

KeyBanc also expects Tyson management will raise its long-term guidance as cost savings are projected to increase the operating margins in the company’s chicken and prepared foods segment. Carlson anticipates volume growth combined with strong margin performance in fiscal 2018 resulting in long-term operating margin guidance being raised to 12%-14% in prepared food and 10%-12% in the chicken segment. He said those segments normally operate with margins of 11% and 10%, respectively.

Analysts at Zack’s Equity Research also expect Tyson Foods to beat earnings expectations on Monday, noting Wall Street analysts recently revised earnings upward as many of the company’s segments enjoy a positive operating climate.

A more conservative view comes from J.P. Morgan analyst Ken Goldman, who said food processors are under pressure. He is neutral on Tyson Foods saying the company is positioned in areas to grow market share with meal combos 9% year-over-year. But fresh meat growth is expected to be flat and deli meats like ham are expected to lose 1% in market share.

Tyson Foods shares (NYSE: TSN) closed Thursday (Nov. 9) at $73.82, down 18 cents. For the past 52-week period shares have ranged in price from a $74.04 high to a $55.72 low. Tyson Foods shares are up year-to-date more than 17.28%.