Meat and food production giant Tyson (click ticker for report: ) reported slightly weaker than expected earnings for its fiscal year 2012 third quarter. Revenue came in at $8.3 billion, over $400 million short of consensus expectations and down 4% year-over-year. Earnings fell 2% to $0.50 per share (net of a debt extinguishment charge), which was also lower than the Street had expected. Management wasn’t too optimistic regarding fiscal year 2013, as the firm expects production to decrease as costs rise.
Sales in the chicken segment grew 4% to $2.9 billion during the period. Volumes tumbled 4%, but that was more than offset by an 8% increase in average selling prices. As a result, operating margins grew 430 basis points to 5.3%, resulting in a four-fold increase in profits to $153 million. Though the firm is hedged for at least the fourth quarter of 2012, we expect higher input prices from surges in feed costs to hurt profitability during fiscal year 2013.
Beef segment sales were relatively flat at $3.5 billion, though the operating margin in this segment was halved to 2%, resulting in a 50% lower profit of $71 million. Volume fell 14%, though average selling prices grew 15%, negating the decline. Fed cattle supplies are expected to fall 1-2% during fiscal year 2013, but the company projects strong export demand to continue–though it warned its operating margin in this segment could fall below its normalized range of 2.5%-4.5%.
Tyson’s other large product, pork, also saw sales fall by nearly 5% to $1.3 billion. Operating margins dropped 370 basis points to 5.1%, resulting in profit falling 44% to $69 million. Unlike chicken and beef, management is optimistic about pork’s prospects during fiscal year 2013 thanks to strong global demand and the firm’s position as a top exporter.
Ultimately, we thought the quarter was decent, and we were particularly encouraged by the firm’s extinguishment of high yield debt, which was replaced with debt yielding just 4.5% (was 10.5%). Tyson’s liquidity position is fine, but we’re not crazy about the company in the near-term. The firm’s margins will likely continue to suffer, especially if there is backlash from large restaurants against price increases. We think shares are undervalued on a DCF basis, trading below our fair value range of $19-$31. However, we’d wait for its score to improve on our Valuentum Buying Index (our stock-selection methodology) before adding the firm to the portfolio in our Best Ideas Newsletter.