Challenges in beef industry pressure Tyson Foods’ earnings outlook

Tyson Foods has seen a turnaround in its chicken segment but industry challenges remain for the company’s beef segment which is weighing on earnings potential in the near term, according to Pooran Sharma, an analyst with Stephens Inc.

He said fundamentals in Tyson’s chicken business are strong and the prepared foods and pork segments have improved, but combined that will not be enough to offset challenges with beef, particularly given the size of the beef business in relation to Tyson’s overall sales and operating income.

“Tyson’s beef business is a significant contributor to overall earnings and is not expected to see relief from herd expansion for another few years. As such, we remain on the sidelines as beef earnings can get worse until they get better. We would wait for a more attractive entry point or until we receive further clarity into an improvement in earnings growth,” Sharma noted to investors on Oct. 2.

The last Stephens rating on Springdale-based Tyson Foods was an “overweight” or “buy”  from Ben Bienvenu who left the firm earlier this year. Sharma said coverage of Tyson has resumed and he gives the company an “equal weight” or “hold” rating.

Sharma’s estimate for fiscal 2024 revenue is $53.3 billion, with modest growth to $53.8 billion in fiscal 2025. He pegs fiscal 2024 earnings per share at $2.85 on an adjusted basis, growing to $3.43 the following year. Tyson wrapped up its fiscal year on Sept. 30. For the fourth quarter, Stephens pegs earnings per share of 67 cents, reversing the loss of $1.27 per share a year ago.

He estimates the margin in the chicken segment slightly below normal at 5.7%, pork at a low 2.4%, beef margins at 1.6% loss, and the prepared foods segment margins at 9.4%.

The biggest issue with the beef segment is the continued liquidation of the nation’s cattle herd with no signs of rebuilding. The length of the beef cycles and the fact there is no meaningful herd expansion is problematic for packers who rely on the cattle they procure for slaughter. Sharma said any herd expansion is still a few years away.

The Stephens beef processing margin estimates for Tyson’s fourth quarter totaled $100.91 per head, down from $164 per head a year ago. The 5-year average margin for the period was $374 per head. Also during the quarter, slaughter was up year-over-year. Live cattle prices peaked at $190 per hundredweight in July before dropping back to around $180 by the end of the quarter. Higher prices for live cattle have led to higher beef prices for consumers with U.S. retail choice beef prices hitting a record $8.50 per pound in the quarter.

The caution in beef also prompted investment firm Piper Sandler to downgrade the shares from a neutral position to a sell recommendation. Analysts do not believe Tyson will grow earnings until the beef segment improves. Tyson Foods will report its fourth-quarter and fiscal 2024 earnings on Nov. 11.

Sharma’s one-year target price for Tyson Foods shares (NYSE: TSN) is $57. Piper Sandler tagged the shares at $50 for a one-year target and indicated the shares could lose about 15% of their value. The shares closed at $59.21 on Wednesday, down 55 cents on the day. Tyson’s stock price is up 10.16% year to date.