Tyson Foods (NYSE:TSN) has caught our attention today as it has just reported a dandy of a quarter. In this column we discuss the Tyson Q4 earnings report. Remember that this is one of the largest food companies in the United States, and has been in business for 70 years. It is a powerhouse in its sector. After looking into the company, we have been bullish on the name, essentially giving the stock a hold, but did bless buying on some dips. The stock recently fell back and was a rare buying opportunity given share buybacks, favorable chicken pricing and dividend increases. For a while it sure seemed like the sky was falling, but this set up a potential long-term entry point. With the stock at 52 week highs and trading at just 14 times earnings, can we buy following the Tyson Q4 earnings report?
Performance and expectations
It all comes down to performance and expectations. Let us discuss the report. Year-over-year, the company saw sales that were up very slightly, rising 10.8% to $10.15 billion in fiscal Q4 2017. This move is positive as recent quarters saw essentially flat to slightly up sales. These revenues beat estimates by $260 million. Of course, some of this change year-over-year on an absolute basis was tempered by currency issues associated with a stronger dollar that are plaguing domestic companies, but there were some noticeable issues in the Tyson Q4 earnings report.
That said, the company delivered a quarter that saw some significant improvements in key areas. In fact, operating income rose significantly to $681 million, up from $586 million. Making some adjustments, non-GAAP operating income was up heavily to $902 million from $586 million. On a more positive note, the company saw its adjusted earnings per share come in at $1.43, up significantly quarter-over-quarter ($1.28) and year-over-year ($0.96). These earnings further beat estimates by $0.05. So where exactly did these earnings come from? Well we need a segment by segment breakdown to understand the most recent quarter in more detail.
As always, let’s start our Tyson Q4 earnings report review with the flagship product in chicken. Tyson saw sales volume and average sales prices that rose 4.1% and rose 3.7%, respectively, year-over-year. In Q4 2017, the company saw sales of $3.035 billion versus $2.811 billion last year for chicken products. Operating income increased in Q4 2017 to $263 million versus $220 million in Q4 2016. Operating income for the 12 months and fourth quarter was above prior year record results.
As we have said before the price of beef for consumers continues to be out of control, though it starting to come down. This is the one commodity that still concerns me, as too high a price can hurt demand. There was a slight hit in prices once again for consumers as the average sales price rose year-over-year (up 6.0%). Sales were up to $3.808 billion from $3.477 billion. Higher prices hurt the consumer for an already high-priced staple, but consumers ignored this as volumes rose 3.3%. It was nice to see a bump in operating income to $305 million from $139 million thanks to cost controls.
The pork segment saw a strong increase in prices and a minor decline in volumes. Volumes were down 1.2% while there was a strong 11.7% increase in prices. As such, revenues were up slightly to $1.362 billion from $1.235 billion last year. Strong exports outpaced the increase in live hog supplies. Operating income increased to $121 million from $108 million as the company maximized revenues relative to the live hog markets, partially attributable better operational mix performance, offsetting higher operating costs.
Turning to prepared foods, the company continues to see struggles in the operating income front thanks to higher sales expenses, but there was a nice boost to sales. Sales came in at $2.263 billion, rising from $1.837 billion. Both average sales price and volumes increased steadily. Sales prices rose 12.5% while volume ticked up 9.5% However, with slightly increased operation expenses, operating income narrowed, coming in at $11 million versus $133 million last year. This pressured margins to 0.5% versus 7.2% last year, the only real blemish on an otherwise stellar quarter.
So, all things considered the Tyson Q4 earnings report was a homerun of a quarter. The stock should get a nice boost on these numbers. We like good companies at a fair price. This is a dominant player in the space. The yield has grown. The price is fair. Looking ahead the company has sold non-performing brands and has acquired AdvancedPierre Foods for $3.2 billion. This should add $1.8 billion in revenues for 2018. The outlook remains solid. We like the name under $70, so wait for a pullback.