Tyson Foods (TSN) 4Q16 Earnings Takeaways – Heightened Risk After 3 Years of Deflation

Tyson Foods (TSN) shares are trading 15% lower on weak profit outlook despite record margins. This earnings report is a reminder of the impact of soy meal price volatility on Chicken profitability and EPS was a reminder of heightened commodity risk after 2-3 years of extended deflation tailwinds.

FY2016 saw record EPS, Operating Income and Operating margin helped by the sales of branded products. Prepared foods and pork products segments also had record margin for the fiscal year. Beef segment saw a large turnaround, swinging from a $66M operating income loss in FY2015 to a $347M profit in FY2016. Despite all the record numbers above, 4Q results were below consensus expectations with EPS at $0.96 vs. $1.17 and revenues at $9.16B vs. $9.4B. YoY adjust sales posted a 5.1% decline, led by $600M lower beef segment revenues.

The Company’s expected EPS guidance for FY2017 is at $4.70-$4.85, well below estimates of $4.98. Management said they anticipate synergies of around $675M from continued integration of Hillshire Brands, a slight reduction of their $700M previous estimate as some savings were pushed out to FY2018.  Sales are expected to be flat compared to FY2016, with lower beef prices offsetting sales volume growth across all segments. TSN also announced that CEO Donnie Smith stepping down after leading the company since 2009. He will be replaced by President Tom Hayes.

Prep Food – On the bright side, it would interesting to see if Prep Foods maintains recent volume growth. From RBC Capital:

“Watching to see if Prepared Foods maintains recent volume growth momentum: The company’s new FY17 margin target of 10% (versus 10%-12% normalized range) implies a high level of investment in innovation and marketing. We will be watching to see if investment yields strong growth and a premium implied CPG multiple. Recent growth seems solid. Tyson’s “Core Nine” brands delivered 10% volume growth this quarter, which closely aligns with 8% unit growth in Nielsen measured channels. We wonder whether this significant market share capture will continue through FY17 behind planned new product launches and marketing.”