Tyson Foods expected to report lower second-quarter profits

Tyson Foods is expected to report lower earnings on Monday (May 6) ahead of the market opening. Wall Street analysts have pegged the second fiscal quarter profits at $1.14 per share, falling 10.23% from a year ago. Consensus net income for the quarter ending March 31 is projected at $420 million, compared to $551 million reported in the year-ago period.

While profits will be slimmer, the consensus for revenue is a 5.2% gain over the year-ago period with total sales of $10.28 billion. The company’s revenue growth is aided by the expanded business from the Keystone Foods acquisition and higher overall prices for chicken, pork and beef in the back half of the quarter.

In February, Tyson Foods CEO Noel White reduced fiscal 2019 earnings guidance citing cyclical challenges in the second quarter with profits to improve toward the second half of the year. For the full year, White said Tyson Foods should earn between $5.75 an $6.10 per share with the Keystone integration expanding domestic and international growth. Tyson Foods completed the Keystone Foods acquisition in the first quarter that included a 6-cent per share charge to earnings.

MEAT SEGMENTS
Tyson Foods is expected to see beef segment gains as the industry had an average processing margin of $141.24 for the quarter. This should produce another solid quarter of operating income at roughly $170 million. Operating income is expected to be lower than the record quarters of the past three earnings cycles.

The pork segment is expected to hold its own as the average packer margin was $23.53 for the quarter, up from $21.14 a year ago. The pork segment has seen packer margins dip lower in April, but retail prices have been steady the past three months at $3.80 a pound, on par with a year ago. Tyson Foods’ pork segment tends to outperform the industry and is expected to see operating income of roughly $65 million in the second quarter. Analysts believe pork will be the weakest segment for Tyson Foods in the second quarter report.

Tyson Foods’ chicken segment has improved since January. The chicken processing margin was 7 cents a pound in January, down from 10 cents a year ago. That improved to 12 cents a pound in February and 16 cents a pound in March. For the quarter the chicken processing margin was even with the same period last year.

Wholesale chicken prices were higher for wings in the quarter but lower for breast meat and leg quarters compared to a year ago. Tyson Foods’ chicken segment has improved from the first quarter when operating margins averaged just 2 cents per share. Analysts expect Tyson Foods’ chicken segment could have an operating income of about $225 million. This is better than the previous period but still below the $288 million in operating income reported a year ago.

The wildcard in Tyson Foods’ portfolio is the prepared foods segment, which is expected to report results of about $220 million for the quarter. White told the media in February the prepared foods segment at Tyson Foods is the long-term growth engine for the company. He said the margins are high and sales opportunities include non-meat proteins the company is developing internally.

Tyson Foods’ international segment is expected to see an operating income of about $10 million, which would be the first positive quarter for this segment in several years. White said the company will likely begin breaking out international earnings and sales numbers given its larger size following the Keystone Foods acquisitions.

MIXED SENTIMENT
Analysts are mixed on Tyson Foods. Ben Bienvenue, an analyst with Stephens Inc., is bullish on the company with a quarterly earnings estimate at $1.22 per share, among the highest on the street. Bienvenue is overweight on the stock.

“We remain positively inclined on the sector in general with Tyson and Pilgrim’s as our top picks. While trade headlines create noise and tariffs caused headwinds in the prior year, the industry is beginning to lap the impact of those restrictions,” Bienvenue noted to investors on April 5.

He said supply has been tight in the chicken market and moderate in beef and pork. With improving demand in chicken, pricing has also increased. With feed costs expected to remain low for the balance of this year, Tyson Foods is seeing fatter margins across the board.

Other analysts are not as positive on Tyson Foods. Standpoint Research Equity Advisors recently downgraded the company’s shares from a “buy” to a “hold” position. J.P. Morgan is also neutral on the stock given trade concerns and multiple lawsuits that will take time and money away from the core meat business.

Shares of Tyson Foods (NYSE: TSN) have been on a steady run this year, opening at $53.35 Jan. 3, and trading at $75.05 in the early afternoon session on Thursday (May 2). Tyson Foods shares are up 40.6% year-to-date.

Tyson Foods is trading at 14.5 times its earnings. Bienvenue believes the stock has more room to run and gives the stock a target price of $78. Other analysts like Ken Goldman at J.P. Morgan are content to sit on the sidelines given recent price appreciation.