Wall Street expects big third quarter profits for Tyson Foods

Analysts predict Tyson Foods will earn $387 million in fiscal third quarter net income, a gain of 45% from the year-ago period. That equates to 93 cents per share, a healthy increase from 75 cents reported in the 2014 third quarter.

Third quarter profits ending June 30 include the combined businesses of Tyson Foods and Hillshire Brands, which were operated as separate companies in that period of 2014 as the merger was not completed until the fourth quarter of 2014.

Total revenue is expected to exceed $10.3 billion, a gain of 6.5% from the year-ago period. Tyson will report earnings on Monday (Aug. 3) before the equity markets open in New York.

Overall, analysts are bullish on improved profits for Tyson Foods given that its transformation into a house of branded favorites like Ballpark franks and Jimmy Dean sausage carries bigger margins than the commodity business the meat giant operated prior to its Hillshire acquisition.

Tyson Foods maintained its earnings guidance for 2015 and 2016 after its solid second quarter results reported in May. The guidance for 2015 earnings per share is $3.30 to $3.40. Sales guidance was tweaked downward slightly to $41 billion this year.

Tyson execs announced in May a plan to accelerate the one-chicken short strategy in which it buys commodity breast meat and further processes it for its customers. This helps to insulate the meat giant from the volatile business of growing the birds in the hot summer months. The company expects it will buy 2% of its chicken needs from outside suppliers this year. In fiscal 2016, Tyson said that could rise to 3%.

Robert Moskow, analyst with Credit Suisse, likes the strategy. 

“We still view the chicken industry as cyclical in nature, but Tyson's leadership here (and the capacity limitations on the breeder flock) eases some of our concerns about an abrupt reversal from the current peak. The risk is that Tyson's competitors may increase their capacity and grab market share,” Moskow wrote in an investor note.

Moskow is neutral on Tyson Foods shares.

In the third quarter analysts expect a profitable chicken segment despite some weakness in frozen chicken sales at retail this summer. Insiders at Tyson told The City Wire recently that frozen chicken sales at its largest customer Walmart were soft throughout the July 4th holiday in part because the retailer was discounting its fresh traypack chicken pieces popular for summer grilling.

Chicken sales are expected to top $2.78 billion, down from the $2.829 billion reported a year ago. The lower sales relate to weaker chicken prices amid abundant supplies and weak export demand. The expected operating income for the chicken segment is $290 million, up from $206 million a year ago. The operating margin is expected to roughly 11%. 

Tyson’s beef segment is expected to post third quarter sales of $4.315 billion, up 8% on price increases on 5% less volume. The beef operating income is expected to be $90 million down from the $101 million booked a year ago. 

The company’s beef operating margin in the quarter was around $51 per head, down from $58 per head in the same quarter last year. Tyson also slaughtered fewer cows in the quarter from a year ago as a result of less consumer demand for higher priced beef.

The shining star of the meat giant’s protein portfolio is expected to be the expanded prepared foods division. Sales are expected to be $1.956 billion, up 117% from a year ago with the new branded meats picked up from Hillshire Brands. Operating profit in the segment is expected to top $170 million, compared to a $1 million loss a year ago. The operating margin is expected to be 8.7% compared to the -0.1% margin reported last year.

Tyson’s pork segment is expected to produce net sales of $1.204 billion, down 19% from a year ago. Most of that decline relates to depressed pork prices while volume is expected to have declined about 4.4%.

The company’s international sales will be lower given that it recently closed the sale of its Brazilian and Mexican business unit to Pilgrim’s Pride. The only international presence Tyson Foods has is in China and a small operation in India. 

Tyson Foods CEO Donnie Smith said the company continues to be ready to ramp up its China operations when it sees clear signs that consumer demand for chicken has returned following bird flu and other food safety concerns that have Chinese consumers at bay.

CNBC Mad Money host Jim Cramer recent said Tyson Foods has almost “cornered the market on protein” with it’s Hillshire Brands highly valued meats.

"I know people think about natural and organic, and they should be adding protein to part of the theme."

He said Tyson’s management also is committed to controlling costs and using its robust cash flow to buyback shares, which is another plus for shareholders. Investors want "consumer names that are not expensive and that are going to be rerated," he said, and Tyson "is going to be rerated upwards."

Tyson Foods shares (NYSE: TSN) closed Thursday at $44.33, up 56 cents. The share price has ranged from a $45.10 high to a low of $36.12 over the past 52-week period. Since the first of this year Tyson shares have risen almost 11% against a mostly flat market.