Wall Street expects lower 3Q profits for Tyson Foods, but higher revenue 

Tyson Foods is expected to report lower profits on Monday (Aug. 5) for the meat giant’s third-quarter ending June 30. Wall Street consensus is $1.47 per share, compared to $1.50 earned in the year-ago period. Net income is expected to total $536.27 million for the quarter, down slightly from $541 million earned a year ago.

Despite the slightly lower income, revenue is expected to top $11.103 billion, up 10% year-over-year, thanks in part to the company’s acquisition strategy with Keystone Foods and BRF assets in Thailand and Europe.

The company’s core meat segments are expected to report slightly lower gross profits compared to a year ago. The chicken segment is slowly improving, but with likely higher grain costs in 2020, the recovery could be short-lived, according to some analysts.

Stephens Inc. Analyst Ben Bienvenue is bullish on chicken processors overall given breast meat prices are likely to recover more fully in the months ahead which could help offset some of the rising feed costs. He said the supply of chicken is manageable and the impact from African Swine Flu (ASF) on the global stage is likely to be a growth driver for chicken in the back half of this year.

During the quarter, Stephens reports the chicken processing margin averaged 19 cents a pound, which was 9 cents higher than the year-ago period and 7 cents higher than the previous quarter.

“Tyson remains our top pick in the space followed by Pilgrim’s Pride. We remain more cautious on Cal-Maine, Hormel and Sanderson,” Bienvenue noted. (Little Rock-based Stephens conducts investment banking activities with the companies in this report at times and is compensated accordingly when doing so.)

On July 17 Stephens reduced its third-quarter estimates for Tyson Foods from $1.43 per share to $1.42 per share with a full-year earnings estimate of $5.91, down from $6 previously. Bienvenue said 2020 earnings were adjusted higher to $6.58 for the full year. In that note, Bienvenue said chicken prices have been slightly weaker than expected in the quarter. He expects the chicken segment will have an operating income of $206 million, up from $196 million reported a year ago and the street consensus of $195.8 million.

Tyson’s beef segment is expected to have an operating income of $293.5 million, according to consensus, down from $319 million a year ago, and down from the Stephens estimate of $306.3 million. Packer margins averaged $243 a head in the quarter, which Stephens said is down 14.5% from a year ago, but 70% better than the previous quarter.

“Beef profitability continues to be very strong on ample cattle supply and robust export demand. We expect this trend to continue through the back half of the year and into fiscal year 2020,” Bienvenue noted on July 17.

Tyson’s pork segment is expected to report gross operating income of $65.9 million, down from $67 million reported a year ago. Stephens expects pork segment income of $64.7 million, citing weaker demand relative to slaughter which is pressuring margins for the industry. Bienvenue said pork demand should catch up within the second half of the year, along with improved imports.

“During the quarter, the Stephens pork processing margin averaged $8.60 a head, down 51.9% year-over-year and down 63.4% vs. the prior quarter as hog prices increased significantly on expected ASF-driven demand,” Bienvenue noted.

Bienvenue expects the Prepared Foods segment will report gross operating income of $198.3 million, lower than the consensus of $225.1 million and the $249 million reported a year ago.

The company’s international division is expected to have an operating income of $12.5 million, according to the Stephens estimate. The consensus estimate is $5.8 million, both are an improvement of the losses of $15 million in the year-ago quarter.

Bienvenue said Tyson Foods is Stephens top pick in the food processing sector. He said while higher feed costs have created some volatility in stock prices, “we think African Swine Flu will be a material driver of profitability going into 2020.”

Stephens rates Tyson Foods a buy with a one-year target price of $95. The street consensus target price is $88.46, with a buy rating given by 11 analysts following the company. Five other analysts are neutral on the stock, according to Yahoo! Finance.

Tyson Foods shares (NYSE: TSN) were trading at $80.13, down $1.21 in normal volume at midday Wednesday, (July 31). For the past 52 weeks, the share price has ranged from $49.77 to $84.30. Through the first seven months of this year, Tyson shares are up 53%.