Big second fiscal quarter profits expected for Tyson Foods

The stars have been aligned for Tyson Foods this past year and the meat giant is expected to produce another record quarter when it reports earnings on Monday (May 5) with estimated net income of $223 million. This would be a nice rebound from the $95 million reported in the year-ago period.

Wall Street analysts expect 63 cents per share for the three months ending March 31. If they hit that estimate it would be a 75% gain in net earnings, which would likely come on the strength of higher chicken prices and reduced grain costs.

Tyson Foods competitor Pilgrim’s Pride reported an 80% turnaround in its profits on Thursday (May 1), a good sign for Tyson investors as the two companies run similar chicken operations, analysts said.

Tyson Foods CEO Donnie Smith recently said more consumers are moving to chicken because of its value compared to escalating beef prices. That has spurred chicken production across the industry and total pounds processed are expected to be 3% more this year. But that uptick in production doesn’t bother Smith.

“When you look at the halo effect, you’ve got very high beef prices, record high pork prices and chicken is very cheap, relatively speaking. … It doesn’t worry us at all to have an increase in supply of let’s call it 3% or so because the demand is going to be there to absorb that,” Smith said during a recent investor conference in New York.

Smith also said consumers can expect higher meat prices across the board this year, and food service customers are on shorter contracts to mitigate the risk of prices fluctuations related to grain and other input costs.

Tyson is expected to report $8.85 billion in sales revenue for the quarter, a 5.10% gain from the same period last year, according to Wall Street consensus. Analysts expect Tyson to report solid gains in its chicken segment, with losses in its red meat business. 

Steve Kay, publisher of Cattle Buyers Weekly, said beef packers had a tough quarter. He said packers are experiencing their toughest operating climate in several years. He said packer margins were negative for the entire quarter ending March 31 and they stayed in the red in April as well. 

“Live cattle prices are going to have to go lower before packers can resume profitable margins,” Kay said. “Packers and retailers are hoping consumers will step up to the plate and buy beef as the summer grilling season will kick off this weekend. I can tell you that retailers will likely feature less beef this year and consumers may not want to pay $9 to $10 per pound for a choice steak. Packers may not be able to pass along the higher live cattle costs they are experiencing.”

Kay expects beef processing margins to be below the normalized range this year and next year as the cattle supply continues to tighten. 

He said the run up in pork prices related to the PED virus has been irrational. On the consumer side, pork prices are already up 8% this year and they are expected to jump another 10% to 12% in the back half of this year, according to the National Pork Council.

Kay said it is unclear if the virus impact has peaked and he expects more pork to hit the market and prices to remain high. Smith said Tyson will try to pass along those higher costs to consumers and its food service customers.

STOCK DOWNGRADE
Investors of Tyson Foods have experienced an exceptional rise in value over the past year as share prices are up 73% from 2013.

The hefty rise prompted a rating downgrade by BMO Capital this week, from a “buy” to a “hold” position. BMO has a $43 price target for Tyson stock, and with the shares closing Thursday (May 1) at $42.41, BMO said its downgrade is a “mission accomplished” note, and not “Houston, we have a problem.”

Tyson is priced at 18 times earnings, but projected to grow at only 7% over the next five years. Tyson shares look more than fully valued, according to Motley Fool analyst.

Tyson shares (NYSE: TSN) closed Thursday (May 1) at $42.41, up 44 cents. During the past 52 weeks the share price ranged from a $44.24 high to a $23.39 low.