February 6, 2012

 

Tyson's profit surpasses estimates

 

 

As it expects beef margins to recover in the back half of the year, Tyson Foods Inc.'s first quarter profit blew past Wall Street estimates.

 

The US cattle herd shrank for the fifth straight year in 2011, to a 60-year low, as a devastating drought and record high feed costs hit production.

 

The shrinking beef supply has raised costs for buyers like Tyson, the No. one US meat processor, and McDonald's Corp. At the same time, slack consumer demand has made it difficult to pass on the full extent of those cost increases, putting pressure on margins.

 

"Our beef segment is experiencing a rough patch as a result of challenging market fundamentals," said Tyson chief executive Donnie Smith on Friday. "Although we are still outperforming industry indexes, if current conditions continue, our beef results will be pressured in our second quarter."

 

Still, Tyson said beef would be profitable for the full fiscal year, due to expectations that beef margins will return to a "normalised range" in the second half.

 

That forecast was surprising considering that beef industry trends have been worsening, said J.P. Morgan analyst Ken Goldman. He also praised Tyson's diversity of business, selling chicken, beef, pork and prepared foods.

 

"Today's results illustrate why Tyson deserves a premium multiple, in our opinion, to many of its protein peers," Goldman said in a research note.

 

"When one segment suffers, others can come to the rescue, leading to much smoother and less volatile earnings" than those of other meat companies like Smithfield Foods, Pilgrim's Pride and Sanderson Farms.

 

Beef is Tyson's largest unit, accounting for nearly 42% of sales in the latest quarter, followed by chicken with 33% of sales. While beef was the biggest sales contributor, it carried the lowest operating profit as a percentage of sales among Tyson's four units. Beef operating income was US$31 million, or 0.9% of nearly US$3.47 billion in first-quarter sales. Pork operating income carried the highest rate at US$165 million, or 11.2% of roughly US$1.48 billion in sales.

 

Tyson also said its chicken segment returned to profitability in the quarter, despite higher feed costs. It also cited strong performance in its prepared foods business.

 

Tyson's net income fell to US$156 million, or US$0.42 per share, in the fiscal first quarter ended on December 31, from US$298 million or US$0.78 per share a year earlier.

 

Analysts on average were expecting US$0.33 per share, according to Thomson Reuters I/B/E/S.

 

Sales rose 9.4% to US$8.33 billion, meeting analysts' estimates. The company stood by its 2012 forecast calling for sales of at least US$34 billion, helped by price increases related to tighter meat supplies and higher raw materials costs.