Poultry, beef and pork distributor Tyson Foods (TSN) posted weaker than anticipated second quarter results after demand for beef slowed. Revenue was modestly higher than during the year ago period, growing 2% year-over-year to $8.4 billion, which was below consensus expectations. Earnings per share were particularly weak, falling 18% year-over-year to $0.36 as the market anticipated flat earnings. Free cash flow year-to-date is down to -$60 million compared to positive $110 million during the same period last year.
On a segment basis, chicken profits were lackluster due to a $165 million increase in feed costs. Revenue increased 6.3% to $3.1 billion with prices 6.2% higher and volume 0.1% higher. Given the perceived health benefits and the relatively lower cost, we believe consumers could continue to migrate towards chicken. However, operating margins fell in half to 2.5%, leading to a substantial decline in profitability. Management believes results will improve in the back half of the year thanks to strong poultry prices in the US. Feed costs could also ease in coming periods depending on how well the domestic growing season goes.
Beef was a different story, as a 6.5% increase in price was offset largely by a 3.9% decline in volume. Overall, revenue increased 2% year-over-year to $3.4 billion, but the segment posted an operating loss of $26 million. Ground beef demand was actually solid, but it was the premium beef sales that lagged. COO James Lochner added:
"Although demand for ground beef was good, overall beef demand was soft, apparently from the higher prices and the resolving consumer movement towards chicken. This was particularly noticeable in our premium beef programs. We were not able to realize optimum revenue for steak and roast cuts because supplies exceeded consumption. To rectify this situation, we have adjusted our cattle procurement strategies to reflect the softer demand and excess supplies from the premium grains."
Although we're starting to see popular low-carb diets like paleo gain stronger momentum, we think demand will continue to be stronger for chicken relative to beef. Thus, improving the cost structure will be paramount to Tyson's success.
Pork sales were also weak, dropping 4.4% year-over-year to $1.31 billion. Live hog supplies were a bit higher than desired, which drove down costs even while consumer demand remained somewhat soft. Operating margins declined 290 basis points year-over-year to 5.5%, but the company believes overall performance will be strong for the fiscal year. Prepared-foods remains a no-growth business, but renovations to the company's lunch meat plant could provide a boost to segment earnings in fiscal year 2014.
Overall, Tyson reiterated its view that 2013 earnings will be superior to 2012, though the company widened its capital expenditures range to $550-$600 million and modestly lowered its sales outlook to $34.5 billion. Nevertheless, we think shares look fairly valued at this level, so we aren't looking to add them to the portfolio of our Best Ideas Newsletter.