Tyson: All About The Data

| About: Tyson Foods (TSN)


I continue to rate the stock a hold because it has been on fire and is still ahead of itself in my opinion.

Fiscal Q3 earnings are out and I discuss the results.

Watch for the protein supply and feed costs.

Not a fan of projected minimal growth.

About a year ago I wrote about Tyson Foods (NYSE:TSN) and I discussed that it was one of the largest food companies in the United States, and has been in business for 70 years. It is a powerhouse in its sector. After looking into the company, I had essentially given the stock a hold, but did bless buying on some dips. Well, today the stock is once again at/near a 52 week high. I continue to rate the stock a hold because it has been on fire and is still ahead of itself in my opinion.

Why? I feel it is a little ahead of itself given its valuation relative to performance. What do I mean? Well we should look at sales and recent performance. The company's third quarter was impressive, but like any other report we have to look under the hood. Year-over-year, the company saw sales that were down 6.7% to $9.4 billion in fiscal Q3 2016. These revenues were down year-over-year but beat estimates by $70 million. Of course some of this weakness year-over-year on an absolute basis stems from the currency issues associated with a stronger dollar that are plaguing domestic companies, but also there were issues with volumes this quarter. That said, despite the decline in revenues, the company delivered a record for Q3 operating income margins and strong income overall. In fact, operating income spiked 36% to a record $767 million. The company also saw its adjusted earnings per share come in at $1.21 per share, up a massive 51% over last year's $0.62. So where exactly did these earnings come from? Well we need a segment by segment breakdown to understand the most recent quarter in more detail.

As always, let's start with the flagship product in chicken. Tyson saw sales volume and average sales prices that were down 0.9% and up 0.4% respectively, year-over-year. In Q3 2016, the company saw sales of $2.743 billion versus $2.757 billion last year. Despite a slight sales decline, operating income increased in Q3 2016 to $380 million versus $313 million in Q3 2015. Sales volume decreased as a result of optimizing mix and the buy versus grow strategy, partially offset by an increase in rendered product sales. Average sales price increased in the quarter thanks to sales mix changes but decreased through three quarters as feed ingredient costs declined, partially offset by mix changes. There was higher demand as well. Operating income increased due to improved operational execution and lower feed ingredient costs. Feed costs decreased $50 million during the third quarter of fiscal 2016. Record operating margin in the segment was seen and came in at 13.4%. While these results were strong, the company needs of course more than just the chicken segment to perform well.

The price of beef for consumers continues to be out of control, though it starting to come down. Still, it has gotten cost prohibitive to feed a family of 5 a steak dinner consisting of high quality cuts. I have said that before and will say it again. This is the one commodity that concerns me as too high a price can hurt demand. There was some reprieve for consumers as the average sales price was down nicely year-over-year (down 14.6%). Sales were down to $3.78 billion from $4.31 billion. Lower prices more than offset the increase in sales volumes. Volumes were up 2.9% year-over-year. Average sales price decreased due to higher domestic availability of fed cattle supplies, which drove down livestock costs. Operating income increased due to more favorable market conditions associated with an increase in supply which drove down fed cattle costs. In fact, operating income turned positive versus last year. It came in at $91 million versus a loss of $7 million last year.

The pork segment was also once again very positive in terms of operating income despite a sales decline volume wise. Revenues were up slightly to $1.27 billion from $1.21 billion last year. This is because sales prices were up more than offsetting declines in volumes. Sales volume was down 1.7% while sales prices were up 7.2%. Further, operating income jumped to $122 million from $64 million in last year's quarter.

Turning to prepared foods, the company saw declines slightly. Average sales price increased while volumes increased. There were increases in key meat prices. Revenues were flat, coming in at $1.81 billion versus $1.81 billion last year. However, with slightly increased operation expenses, operating income narrowed in this sector, coming in at $197 million versus $207 million last year. This pressured margins to 10.9% versus 11.4% last year.

At the end of the day this was certainly a great quarter with a top and bottom line beat and strong performance in nearly every category except prepared foods. Looking ahead to initial projections for fiscal 2017, the company expects domestic protein production to increase approximately 2-3% from fiscal 2016 levels. Current USDA data shows an increase in chicken production around 2-3% in fiscal 2017 compared to fiscal 2016. Further, feed costs are expected to be stable year-over-year for fiscal 2017 to 2017. The company expects industry fed cattle supplies to be 2-3% higher in fiscal 2017 compared to fiscal 2016. As far as this year goes, the company now sees the beef segment coming in at the normal to higher end of the operating margin guidance of 1.5% to 3.0%. Pork in 2017 should see supplies increase 2-3%. Prepared foods should continue to perform well as well and ingredient costs should be flat year-over-year for 2017. Sales should come in around $37 billion for fiscal 2016 and up 1% from here next year. Considering this very minor sales growth with earnings not projected to rise more than a few points, I think the stock remains a hold.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.