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Shares of Tyson Foods (NYSE: TSN) fell 10% after reporting disappointing fiscal third-quarter earnings on Monday. Tyson, the biggest meat processor in the United States, was hurt by a number of factors affecting its performance, including supply-related disruptions for some of its core products.
In addition, investors were rushing for the exits on news that Tyson cut its full-year profit outlook, reflecting its underlying business challenges.
The share price drop after Tyson earnings wiped out most of the gains the stock has registered this year. But at the very least, the company has a good chance at outperforming expectations over the remainder of the year, now that expectations have been lowered.
Where’s the Beef?
Perhaps the biggest reason why Tyson stock fell double-digits on a percentage basis after its earnings report is because the company suffered weak performance in its beef business. The labor dispute at ports along the west coast of the United States contributed to this.
During this disruption, overseas customers were forced to accept products from international suppliers. Then, when the port issues ended in February, the market was suddenly flooded with supply. Because of this, Tyson then had to resort to discounting to clear excess inventory.
This had a significant impact on Tyson’s margins. Management stated on the conference call that beef sales missed internal expectations by about $84 million last quarter. This is a big headwind for Tyson, because its beef business is its largest segment and itself represented 24% of the company’s operating profit in 2014.
In all, revenue grew 4% year over year. But adjusted earnings came in at $0.80 per share, widely missing analyst expectations of $0.92 per share according to estimates compiled by Thomson Reuters.
Going forward, the company believes that unless business conditions change dramatically, Tyson will not be able to meet its full-year targets. Along with its quarterly earnings report, the company cut its outlook to between $3.10 per share-$3.20 per share. This is significantly below its prior forecast of $3.30 per share-$3.40 per share.
Paltry Poultry
As if its beef-related woes weren’t bad enough, Tyson also suffered last quarter from a deterioration in its chicken business. Management said that bans in some foreign nations on chicken exports, due to the avian flu outbreak in the United States, hurt chicken sales as well.
Chicken revenue fell 2.5% last quarter, year over year, due to a 5% decline in average price. Volumes rose 2.9%, which helped offset margin weakness, but overall chicken sales could not counteract the poor results in the beef business.
Fortunately, revenue grew on a year-over-year basis, largely due to the buyout of Hillshire Brands last August. But investors clearly weren’t satisfied with revenue growth purely as a result of acquisition.
And, things aren’t expected to get better anytime soon. Management notified investors that conditions have not improved substantially so far in the current quarter. In fact, the company does not believe the beef-related supply issues will fade before the second half of 2016.
As a result, while Tyson should remain profitable through its challenges, investors don’t have much to look forward to for several months at least.
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