Tyson Foods’ Fiscal 2Q16 Earnings and Updated Guidance

(Continued from Prior Part)

Updated guidance

In its fiscal 2Q16 earnings release, Tyson Foods (TSN) updated its outlook and guidance for fiscal 2016. The company mentioned that the Prepared Foods segment should benefit the most. It expects lower raw material costs of ~$200 million in fiscal 2016. The operating margin for this segment is supposed to be near the low end of its normalized range of 10%–12% in fiscal 2016. The company plans to achieve this through continued investment in innovation, brand strengthening, and new product launches.

Segment-related guidance

For the Chicken segment, the company expects lower feed costs of ~$200 million in fiscal 2016. This is based on futures prices as compared to feed costs in fiscal 2015. This segment is projected to deliver an operating margin of more than 12%. For the Beef segment, the company expects industry fed cattle supplies to increase around 1% in fiscal 2016 compared to fiscal 2015. Hence, it expects the operating margin to be in its normalized range of 1.5%–3.0%.

For the Pork segment, the company believes industry hog supplies will increase by 2% in fiscal 2016 compared to fiscal 2015. The operating margin is expected to be around 10%. The Other segment includes Tyson Foods’ foreign operations associated with raising and processing chickens in China and India. It also includes third-party merger and integration costs. The company expects this segment’s operating loss to be ~$85 million in fiscal 2016.

Outlook for fiscal 2016

Tyson Foods’ projection for sales remains at ~$37 billion for fiscal 2016 due to declining beef, pork, and feed prices. Capital expenditures are estimated to be ~$850 million for fiscal 2016. The company expects to increase share repurchases under its share repurchase program. Tyson Foods has repurchased ~3.0 million shares for $200 million so far in fiscal 3Q16.

The company expects domestic protein production (chicken, beef, pork, and turkey) to rise ~2%–3% from fiscal 2015 levels along with moderate export growth. This would put pressure on protein pricing. The company expects to realize incremental synergies of more than $200 million from the integration of Hillshire Brands in 2016. It expects to see synergies of more than $500 million in fiscal 2016 and more than $700 million in fiscal 2017 from the acquisition. The company hopes its profit improvement plan for the Prepared Foods segment will contribute to this goal.

Competitors

Tyson Foods’ peers in the industry include Cal-Maine Foods (CALM), Flowers Foods (FLO), and Pilgrim’s Pride (PPC). CALM, FLO, and PPC have reported year-to-date returns of 5.5%, -9.7%, and 31.3%, respectively, as of May 11. The PowerShares Dynamic Food & Beverage Portfolio (PBJ) invests 2.5% of its holdings in CALM.