Tyson Foods is expected to report a second quarter profit of $1.32 per share, or roughly $485 million, up 42% from the year-ago period, according to the Wall Street consensus. The Springdale meat giant will report fiscal second quarter earnings before the markets open Monday (May 7).
Revenue is forecast at $9.878 billion for the second quarter ending March 31, according to the consensus. Tyson Foods had revenue of $9.083 billion in the same quarter last year.
But some analysts, including JP Morgan’s Ken Goldman, recently trimmed earnings guidance for the quarter. Goldman reduced his earnings per share from $1.53 to $1.27 on concerns of $200 million more this year in rising freight costs and weaker chicken and pork prices resulting from increased production in recent months.
Tyson Foods President and CEO Tom Hayes has said inflationary pricing and tightening freight capacity were rising faster and higher than previously expected. He said then the company included higher costs in its own outlook and plans to pass the cost through to customers. Goldman said Tyson Foods could have trouble passing along the higher operating costs because most branded food manufacturers are struggling to do so. Goldman added Tyson Foods’ beef and pork businesses are more commodity-oriented and pricing is derived from supply and demand dynamics. He said there is a lag between changes in costs and price increases.
“We remain skeptical but look forward to hearing from the company about its progress along these lines. Perhaps the higher growth profile for many of Tyson’s businesses will provide the negotiating leverage that management needs to raise prices,” Goldman wrote in a note to investors.
Goldman said Tyson Foods could miss expectations in the second quarter, but then recoup costs. He raised third quarter earnings expectations to $1.88 per share, up from $1.64. That said, the full year earnings have been reduced by a nickel per share. For the full year, Goldman expects Tyson Foods to earn $6.64 per share. Tyson Foods has forecast an earnings range of $6.55 to $6.70 for the fiscal year. JP Morgan and Goldman are neutral on Tyson Foods stock.
Analysts with Zacks Investment Research recently reduced Tyson Foods shares from a “buy” recommendation to a neutral “hold” rating.
“Tyson Foods has surpassed the industry in the past year owing to strong performance in all business segments, particularly chicken and beef. The prepared foods category has also been depicting solid growth in particular, courtesy of rising demand for protein-packed brands and synergies from the AdvancePierre buyout,” Zacks noted in the report.
The analysts also said solid volumes across most units and savings from the company’s financial fitness program helped fuel the first quarter results and promoted optimism for another record year.
“However, the company continues to incur higher wage and freight costs due to tightening market conditions. These hurdles are expected to linger and increase the cost burden in fiscal 2018. Estimates have been witnessing a downtrend ahead of the company’s second-quarter fiscal 2018 results,” Zacks noted.
Analysts with Credit Suisse also recently rated Tyson Foods as a “hold” with a price target of $78. That is well below the $94 target set earlier this year by Piper Jaffray who still rates the stock a “buy” but last month lowered the target to $92. Stephens Inc. is overweight on Tyson shares with a target price of $90. Stephens said Tyson’s diversified portfolio gives it some protection against the trade tariffs imposed by China.
Not all Wall Street analysts are optimistic about Tyson Foods’ ability to grow amid higher export tariffs and trade tensions. Tim Ramey of Pivotal Research recently downgraded Tyson Foods shares to a sell position and cut the target price from $75 to $55. Ramey said China is the second largest export market for U.S. pork producers and growing exports to China for chicken and products are the single largest driver of the company’s fatter margins. Ramey also lowered his fiscal 2018 earnings to $6.10 from $6.64.
Tyson Foods (NYSE: TSN) shares opened the year at $80.62 and have retreated to the mid $60s with brief attempts to breakout over the past quarter, but never rising above the mid $70s.
Tyson Foods shares closed Thursday at $66.05, down $1.43. For the past 52 weeks the share price has ranged from $84.65 and $57.20. The consensus target price by analysts for Tyson Foods is $81 per share.
Chicken continues to big business at Tyson Foods. A year ago the company posted operating income of $223 million in its chicken segment, down from $357 million in the prior-year period. Analysts expect Tyson Foods will beat last year’s $223 million in chicken operating income for the second quarter but fall short of the 2016 level. Chicken supplies were up 14% year-over-year and turkey supplies were up 8%.
Chicken processing margins are positive despite industrywide production expected to rise 2% this year. U.S. Department of Agriculture reported frozen chicken sitting in cold storage rose 12% in March from the year-ago period.
Wholesale chicken prices averaged $2.12 per pound in the second quarter, up slightly from $2.03 in the year-ago period, according to the Georgia Dock pricing. Average wholesale boneless, skinless breast prices are down from a year ago to $3.11 per pound. In the year-ago period they averaged $3.25 per pound, according to USDA. Leg-quarter prices are also down year-over-year dropping 10 cents per pound on higher supplies.
BEEF AND PORK
Tyson Foods’ beef business likely enjoyed triple-digit processing margins through the back-half of the quarter. Year-to-date packer margins have averaged about $118 per head, up roughly 12% from a year ago, according to Sterling Beef Tracker.
Box beef prices (wholesale cuts) have been strong for packers which has led to a slight uptick in retail Choice beef prices last month. Derrell Peel, extension analyst at Oklahoma State University, said Choice retail beef averaged $5.87 per pound last month, up from $5.82 the month prior and flat against a year ago. The All Fresh beef retail price jumped to $5.59 a pound, up from $5.53 in February and 0.9% higher than a year ago.
Peel said packers can enjoy wide margins as long as demand stays steady. He said with beef production expected to to rise 5% this year there could be some bargains for consumers at retail this summer.
Pork margins have not been as good for packers like Tyson Foods. Sterling reported average packer margins at $19 per head so far this year, down from $25.25 a year ago. There has been more volatility in pork margin than the beef segment. Last week packer margins were $24.97, down from $37.75 the previous week and up from $17.57 last month. Peel said retail pork prices averaged $1.50 per pound in March, down 0.7% from a year ago and up slightly from the prior month.
Pork tariffs by China could cause pork supplies to back up in the U.S. leading to lower prices, according to Moody’s analyst Brian Weddington. He said Tyson Foods, Hormel Foods Corp. and JBS U.S., would experience a modest impact if the tariffs are enacted.
“The brunt of the pain will be felt by smaller US pork producers that lack value-added sales to offset the effects of falling pork prices,” Weddington noted in the report.
Tyson Foods reported pork exports sales of $971 million last year. Japan accounted for 35% and was the largest buyer of pork from the company among other export countries. Mexico was second with 21% of the sales and China and Hong Kong were third with 15% of export sales. Canada accounted for 10% and South Korea 4%.