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Tyson Foods Inc.’s (TSN - Analyst Report) fourth quarter 2012 adjusted earnings (excluding impairment charges) of 55 cents per share beat the Zacks Consensus Estimate of 43 cents by 27.9%. Quarterly earnings also increased significantly over the prior-year quarter earnings of 26 cents due to input cost reduction and operating efficiencies.

Revenue and Margins

Net sales was flat at $8.4 billion in the quarter, but missed the Zacks Consensus Estimate of $8.5 billion. Sales growth in the Chicken segment was offset by declines in the other three segments -- Beef, Pork and Prepared Foods.

Tyson’s operating income went up 93.0% to $332 million in the quarter. Quarterly operating margin stood at 4.0% of net sales, as compared with 2% of net sales, due to operating efficiencies.

Segment Details

Chicken: Sales increased 5.5% year over year in the Chicken segment to $3.02 billion. However, sales volume dropped 3.5% due to a decrease in domestic production in order to match the declining demand.

Operating margin went up to 3.8% in the Chicken segment against a negative 2.9% in the year-ago quarter, portraying positive pricing, operational efficiencies as well as improved mix.

Beef: Sales in the Beef segment went down 2.4% year over year to $3.43 billion. Sales volume contracted 12.5% in the fourth quarter due to reduced processing of live cattle and increased purchases of outside tallow. Operating margin remained flat at 3.4% due to increase in cattle feed cost.

Pork: The Pork segment revenue slipped 7.8% year over year to $1.32 billion. Sales volume increased 5.0% due to strong export demand. However, operating margin contracted 270 basis points to 5.2% from the year-ago quarter due to less pork margins owing to the excess domestic availability of pork products.

Prepared Foods: Prepared Foods sales declined 2.7% to $805 million compared with $827 million in the year-ago quarter. Operating margin however expanded 140 basis points to 4.8%, fueled by lower raw material costs and higher average sales prices, which were partially offset by lower volumes and increased operational costs.

Fiscal 2012 Results

The company’s fiscal 2012 adjusted earnings of $1.91 per share beat the Zacks Consensus Estimate of $1.76 per share. Quarterly earnings increased 1.1% over the prior-year earnings of $1.89 per share.

Net sales increased 3.1% to $33.3 billion in fiscal 2012, but missed the Zacks Consensus Estimate of $33.4 billion. The company also missed the company’s sales guidance of $33.0 billion provided in the last quarter. All the segments performed well in fiscal 2012.

Other Financial Details

The company repurchased 12.5 million shares for $230 million in fiscal 2012, with 35.2 million shares remaining as of September 29, 2012, authorized for repurchases.

On November 15, 2012, the company’s board declared a special dividend of 10 cents per share on Class A common stock and 9 cents per share on Class B common stock. Additionally, the board increased the quarterly dividend by 25%. Both the special dividend and the increased quarterly dividend will be paid on December 14, 2012, to shareholders as of November 30, 2012.

The board also declared a quarterly dividend of 5 cents per share on Class A common stock and 4.5 cents per share on Class B common stock, which will be paid on March 31, 2013, to shareholders as of March 1, 2013.

Guidance

Tyson believes that overall domestic protein (chicken, beef, pork and turkey) production will decrease by 2% in fiscal 2013 from 2012 levels due to increased costs for cattle and hog producers owing to the drought conditions of summer of 2012 in U.S.

For fiscal 2013, the company expects sales to increase to approximately $35 billion, driven by anticipated price increases related to decreases in domestic availability of protein and rising raw material costs.

The company projects capital expenditure of $550 million in fiscal 2013, which is at the higher end of the previous range of $500-$550 million. Tyson also expects interest expense of $140 million for fiscal 2013, at the higher end of the previous range of $130 to $140 million.

Our Recommendation

We are encouraged by Tyson’s significant presence in the international market. The company has advanced processing capabilities. However, the company faces stiff competition from both national and regional players like Pilgrim's Pride Corporation (PPC - Snapshot Report).

We currently have a long-term Neutral recommendation on Smithfield. The stock carries a Zacks #3 Rank (a short-term Hold rating), following mixed results in the fourth quarter. A peer company, Smithfield Foods Inc. also carries a Zacks #3 Rank.

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