It has been about a month since the last earnings report for Tyson Foods (TSN - Free Report) . Shares have added about 4.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Tyson due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Tyson Foods Q3 Earnings Beat Estimates, Sales Up Y/Y
Tyson Foods posted third-quarter fiscal 2018 results, wherein earnings and sales improved year over year. The quarter’s performance benefited from growth in the Beef and Prepared Foods segments. Gains from buyouts and savings initiatives also drove the results.
However, volumes in the Chicken and Pork segments were dismal owing to lower demand. In fact, for fiscal 2018, the company predicts volatile market conditions to persist for Pork and Chicken. The commodity market is also expected to remain difficult.
Coming back to the company’s quarterly results, adjusted earnings for the quarter came in at $1.50 per share that surpassed the Zacks Consensus Estimate of $1.33. The bottom line also depicted growth of 17% year over year. The quarter’s performance was driven by higher sales, cost savings of $66 million from Financial Fitness Program and 20 cents positive impact from lower tax rates.
Revenues and Margins
Net sales improved 2% to $10,051 million backed by improved Beef and Prepared Foods sales volumes, which offset the declines in Chicken and Pork. Sales volume increased 0.3% during the quarter, while average sales price rose 1.8%. However, sales missed the Zacks Consensus Estimate of $10,236 million.
Gross profit for the fiscal third quarter came in at $1,306 million, up nearly 8.7% from the prior-year quarter. Gross margin also expanded 80 basis points (bps) to 13%.
Tyson Foods' adjusted operating income rose nearly 8% to $816 million. Also, adjusted operating margin for the period came in at 8.1%, up 40 bps.
Chicken: Sales in the segment jumped 3.6% to $2,973 million. However, sales volume declined 0.1% year over year owing to lower demand for certain chicken products, partially offset by incremental volumes stemming from acquisitions. Average sales price in the quarter increased 3.7%, courtesy of change in sales mix and price rise. Further, adjusted operating income declined 3.4% to $196 million, while adjusted operating margin fell 380 bps to 6.6% during the quarter.
Beef: Sales in the segment fell 0.2% to $3,993 million. On the other hand, sales volume rose 2.7% year over year owing to robust demand for beef products, improved availability of cattle supply and higher exports. However, average sales price declined 2.8% owing to increases in cattle supply and lower costs of livestock. Adjusted operating income in the quarter was $319 million, up from the prior-year quarter figure of $147 million. Adjusted operating margin surged 430 bps to 8%.
Pork: Sales in the segment declined 9.5% to $1,197 million. The segment’s sales volume declined 2.1% year over year owing to the company’s efforts to balance supply with consumers’ demand. Average sales price also fell 7.4% due to lower livestock expenses. Adjusted operating income for the segment was $67 million, down 50% from the prior-year quarter. Adjusted operating margin contracted 470 bps to 5.6%.
Prepared Foods: Sales in the segment improved nearly 9.7% to $2,132 million. Prepared Foods’ sales volume grew 2.7% due to incremental volumes stemming from buyouts. Average sales price rose 6.8% owing to higher input costs and gains from product mix stemming from acquisitions. Adjusted operating income was $249 million in the quarter, jumping 27.7% on a year-over-year basis. Adjusted operating margin expanded 170 bps to 11.7%.
Other: Sales in the segment were $75 million, down 11.8% year over year. Sales volume dropped 20% and average selling price in the segment climbed 8.7%. The segment incurred adjusted operating loss of $15 million compared with loss of $20 million in the year-ago quarter.
Other Financial Updates
Tyson Foods exited the quarter with cash and cash equivalents of $170 million, long-term debt of $8,852 million and shareholders’ equity of $12,437 million.
The company generated cash flow from operating activities of $1,924 million for the first nine months of fiscal 2018. Further, management projects capital expenditures at approximately $1.2-$1.3 billion for the fiscal.
Tyson Foods expects demand for protein to rise consistently and is well placed to exploit all opportunities in the space. For fiscal 2019, USDA expects overall domestic protein production (chicken, beef, pork and turkey) to rise roughly 2-3% year over year. With such prospects in protein-packed category, Tyson Foods has been focusing on divesting non-protein businesses. In this regard, the company completed the sales of Sara Lee Frozen Bakery and Van’s businesses for approximately $615 million on Jul 30. Further, the company expects to complete the divestiture of pizza crust business during the fourth quarter of fiscal 2018.
Also, Tyson Foods has been on-track with its Financial Fitness Program. In fiscal 2018, the program is expected to result in net savings of $200 million, buoyed by synergies from AdvancePierre’s integration along with incremental removal of non-value-added costs. Majority of these savings are expected to benefit the Prepared Foods and Chicken segments.
All said, the company continues to expect sales in fiscal 2018 to increase nearly 6% in the range of $40-$41 billion. The upside can be attributed to higher revenues from AdvancePierre, increased volumes in its legacy business and enhanced mix.
Additionally, on Jul 31, management narrowed earnings projection for fiscal 2018. Accordingly, the company expects adjusted earnings for the fiscal in the range of $5.70-6.00 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. Further, management expects lower tax rates to boost the bottom line by 77 cents in fiscal 2018.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Tyson has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Tyson has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.