On the money: Analysts hail Tyson Q1 despite profit slump
Credit Suisse said Tyson's EPS “exceeded our estimates in every business segment"
Tyson Foods managed to garner the support of analysts on the release of its first-quarter results, beating estimates despite continued high feed costs.
The US meat giant booked a 48% drop in profits on Friday (3 February) but the fall in earnings failed to dampen analysts' outlooks for Tyson, who hailed the results as "strong", "better-than-expected", and "well ahead of expectations".
The company, like most in the meat sector, have struggled with high feed costs and this has weighed on Tyson's earnings in the last 12 months. In November, the firm saw reported a 3.8% fall in annual net income and a 17.9% drop in operating income.
Nonetheless, Credit Suisse analyst Robert Moskow said Tyson's EPS of US$0.42 for the first quarter of its new financial year "exceeded our estimates in every business segment, once more proving that the company's transformation into a best-in-class protein operator is sustainable".
"Pork delivered another excellent quarter and chicken was better than we feared," Moskow said, raising his full-year 2012 EPS estimate to $2.10 from $2.00 after a $0.13 beat in the quarter.
Deutsche Bank analyst Christina McGlone believes "considerable deleveraging" by Tyson has "set it apart from the competition".
McGlone said: "The company has been methodical in its approach to reap the benefits of diversification (protein/channel/geography), garner cost savings to outperform the industry across proteins on profitability, and add value to by-products."
Analysts, however, pointed to challenges Tyson is facing in the beef sector, where its volumes fell 8.5% and operating profits dropped by almost three-quarters. Tyson president and CEO Donnie Smith said the company is still outperforming industry indexes but admitted: "If current conditions continue, our beef results will be pressured in our second quarter".
McGlone said that, despite Tyson indicating a "weaker" beef segment in the quarter, she said the company was "deserving of higher multiples, as company-specific efforts at cost reduction, process improvement and diversification gain traction and pricing remains strong".
Nonetheless, McGlone said she remains "a bit more cautious on beef, at this point", and retained her FY2012 EPS estimate of $1.88.
On the same premise, Moskow said he remains "neutral" on the company's stock.
Looking ahead to the full year, Smith has predicted chicken, beef, pork and turkey production to drop, with availability forecast to be down 2% to 3% on fiscal 2011. This, he said, should "continue to support improved pricing".
Smith said Tyson was confident of an improvement in profits in its beef division in the second half.
"While our beef segment remained profitable in the first quarter of fiscal 2012, we were challenged by volatile market conditions which made it difficult to pass along increased input costs," he said. "We have seen difficult margin conditions early in the second quarter of fiscal 2012, but expect them to recover throughout the second-half of the fiscal year. For fiscal 2012, we believe our beef segment will be profitable, returning to our normalised range in the second half of the fiscal year."
BB&T Capital analysts said that management's expectation that beef margins will return to the "normalised range, albeit at the low end, by H2'12", is encouraging.
"Its optimism reflects its view, one we share, that the industry has not become broken over the past few months, but is, instead, in the midst of a temporary period of irrationality," the analysts said.
Still, BB&T Capital lowered its full-year EPS estimate to $1.96 from $2.07. However, it added: "We view the shares as still attractive at current levels given management's proven ability to manage through many different operating environments, improved chicken fundamentals, improved international returns and a strong balance sheet."
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