The world's largest meat-processing company, Tyson Foods
Chicken (31.1% of sales and 75.3% of operating income) saved the quarter, although the small 1.4% increase in volume and the larger 2.5% decline in average selling price led to an overall sales decline of 1.2%. Plumping up operating income was a $113 million drop in grain costs -- suggesting the slang expression "That's chicken feed" could have more than one meaning.
For Tyson, that swing in feed costs meant that a $39 million decrease in gains from grain price hedging (as compared with the year-ago quarter) didn't stop chicken profits from increasing 36.6%.
Beef (46.2% of sales and 13.7% of operating income) didn't have a great quarter despite a 2.3% in volume and a 2.0% increase in average selling price. The overall 4.3% increase in sales was overshadowed by a 69.5% fall in operating profits. While grain prices were lower, the Canadian beef import ban and lower U.S. cattle supplies hurt factory utilization. Also, it should be noted that smaller hedging gains from boxed beef sales hurt results.
Pork (12.1% of sales) saw sales decline 2.1% and a $39 million profit in the year-ago quarter fall to a $19 million loss this quarter. There was also a $14 million operating profit net of the effect of a $33 million legal settlement. Hurting profits, besides weak sales, was an $8 million loss in the hedging program for boxed pork because of higher-than-expected live prices.
Prepared foods (10.4% of sales and 10.6% of operating profits) reported sales fell 1.6%, but operating profits quadrupled to $28 million. A 2.8% increase in average selling price more than offset a 4.2% decline in volume.
The quarter's results, which fell slightly below analyst estimates, also caused the company to revise its full fiscal year earnings estimates downward by a dime to $0.95 from $1.05 a share. While that sounds like a big drop from the estimate at the beginning of the fiscal year (which starts in October) of $1.15 to $1.45 a share, add back in $0.23 of charges, and that range sits at $1.18 to $1.28 -- within that original estimate.
If Tyson's operations were a horse race, there would be no need for a photo finish to see whether the chicken was a beak ahead. For now, it's self-evident that chicken is carrying the load (75% of operating profits) and keeping the company pecking away at a key 2005 overall goal - to reduce its debt-to-capital ratio from 45%. In fact, the company's 40% goal was exceeded this quarter and now sits at 39%.
What investors should be watching, though, are Tyson's operating margins. Competitors Pilgrim's Pride
Commodity-based business may be famous for fluctuating margins (on account of, yep, you guessed it -- fluctuations in raw materials/finished goods costs and associated selling prices), but it's no barnyard honor to be the prize winner for lowest margin!
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