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Tyson Foods (TSN) Q3 Earnings in Focus, 2018 View Hits Stock

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Tyson Foods, Inc. (TSN - Free Report) , which is slated to report third-quarter fiscal 2018 results on Aug 6, witnessed shares decline almost 7% on July 30. Investors’ optimism was dented due to management’s slashed earnings view for 2018. Currently, management expects adjusted earnings for fiscal year 2018 in the range of $5.70-6 per share compared with the previous view of $6.55-6.70.

Well, the company resorted to such a move apprehending negative impacts of increased tariffs and volatility in market conditions that are likely to hurt profits. We may get an insight into this development in the upcoming quarterly release.

That said, lets focus on the factors that are likely to impact Tyson Foods’s third-quarter fiscal 2018 performance.

Cheering on High Protein Demand

This renowned food company has been steadily gaining from rising demand for protein-rich products that has been fueling performance in the Beef, Chicken and Prepared Foods segments. In fact, the Prepared Foods category has been depicting solid growth, owing to rising demand for protein-packed brands and positive synergies from the acquisition of AdvancePierre. Further, Tyson Foods has made several investments to strengthen poultry production in Tennessee.  

Along with the widening demography of protein-savvy consumers, demand for fresh and organic food options have been growing rapidly, courtesy of rising health consciousness. Well, the company’s investments in Memphis Meats and Beyond Meat, underscores its efforts to expand in this space. Recently, the company revealed plans to acquire Tecumseh Poultry that offers organic chicken processed though air-chilling technologies. Further, the company has undertaken divestiture of non-protein businesses (such as Sara Lee Frozen Bakery, Kettle and Van’s) to focus  on the expanding protein-packed food arena.

Buoyed by such factors, the Zacks Consensus Estimate for fiscal third-quarter sales in the Beef, Chicken and Prepared Foods segments are pegged at $4,179 million, $2,988 million and $2,194 million respectively, depicting year-over-year increase of 4.5%, 4.1% and 12.7%, respectively. Well, the strong performance of these segments is likely to aid top-line growth. Markedly, the consensus mark for net sales is currently pegged at $10,401 million, depicting a 5.6% rise from the year-ago quarter’s reported tally.

Tyson Foods, Inc. Price, Consensus and EPS Surprise


Savings Initiatives to Offset Cost Hiccups

Tyson Foods has been witnessing higher freight expenses for a while. Evidently, higher freight expenses affected operating income across Beef, Chicken, Pork and Prepared Foods segments during the second quarter of fiscal 2018. Also, the company expects these hurdles to persist, which is likely to increase overall expenses in fiscal 2018. Apart from Tyson Foods, other food companies like United Natural Foods (UNFI - Free Report) , McCormick & Company (MKC - Free Report) and Conagra Brands (CAG - Free Report) have also been grappling with higher freight and transportation costs. Additionally, Tyson Foods’ performance is prone to volatility in prices of raw materials and raised tariff rates, which may lead to unfavorable volume/mix.  

Nevertheless, Tyson Foods’ savings efforts have been quite impressive and are expected to provide adequate cover to the aforementioned headwinds. In fact, the company’s Financial Fitness Program has been generating operating and supply-chain efficiencies, reducing overheads and fueling bottom-line performance.  Moreover, the company aims to generate savings from this program, through synergies from AdvancePierre’s integration along with additional cost optimization. These efforts are anticipated to generate total savings of roughly $200 million in fiscal 2018. Incidentally, the company generated savings of nearly $65 million from this program in fiscal second quarter, which boosted the bottom line.

For fiscal third quarter, we expect yields from this initiative to fuel earnings. Notably, the Zacks Consensus Estimate for earnings per share is pegged at $1.63, reflecting a rise of 27.3% from the year-ago quarter’s figure. Estimates have been stable over the past 30 days.

Wrapping up, let’s take a look at the picture unveiled by the Zacks Model for the impending quarter.

Zacks Model

We note that Tyson Foods has a mixed record of earnings surprises over the trailing four quarters. Moreover, our proven model does not show that the company is likely to beat earnings estimates this quarter. For this to happen, a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although the company’s Zacks Rank #3 increases the predictive power of ESP, its Earnings ESP of 0.00% makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.

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