Tyson Foods Inc. (TSN) reported its third-quarter 2011 adjusted earnings of 56 cents a share, surpassing the Zacks Consensus Estimate of 40 cents. Profits were driven by higher sales as well as strong performance in all the segments, particularly Beef and Pork segments.

The adjusted earnings in the quarter excluded a $21 million, or 5 cents per share, related to a reversal of reserves for foreign uncertain tax positions.

Revenue and Margins

Net sales recorded a growth of 10.9% to $8.2 billion from $7.4 billion in the year-ago quarter, while it was in-line with the Zacks Consensus Estimate. The upswing came as an outcome of sales growth across all its segments.

Tyson’s operating income declined by 38.5% to $312 million in the quarter compared with $507 million in the prior-year quarter. Quarterly operating margin contracted 300 basis points to 3.8%, portraying an augmented grain and feed ingredient and other raw material costs.

Segment Details

Sales grew 10.8% in the Chicken segment to $2.8 billion compared with $2.5 billion in the year-ago quarter. Sales volume increased on the back of improved production, while increased pricing and mix led to the rise in the average sales prices.

Operating margin came down to 1.0% in the Chicken segment compared with 7.4% in the year-ago quarter portraying increased sales volume and operational improvements more than offset by increased raw material costs.

On a year-ago basis, sales climbed by a decent 11.6% in the Beef segment to $3.5 billion compared with $3.1 billion. However, volume contracted by 1.7% in the quarter. Segment operating margin contracted to 4.0% from 5.6% in the year-ago quarter, as a result of strong export sales which were offset by increased operating costs.

Pork segment revenue spiked 12.7% to $1.4 billion compared with $1.2 billion in the year-ago quarter, powered by a 9.4% jump in price and 3.0% growth in volume. However, operating margin contracted to 8.8% in the Pork segment compared with 10.0% in the year-ago quarter.

Prepared Foods sales increased 6.8% to $804 million compared with $753 million in the year-ago quarter. However, the segment faced a decline in the sales volume by 2.0%, though fully offset by a 9.0% increase in selling price. Segment operating margin climbed to 3.7% compared with 2.9% in the year-ago quarter.

Other Financial Updates

Tyson exited the quarter with cash and cash equivalents of $981 million. Long-term debt was $2.1 billion and shareholders’ equity was $5.8 billion.

In the third quarter, the company repurchased 4.4 million shares for approximately $80 million. At the end of July 2, 2011, 18.1 million shares remain authorized for repurchases and the company is expected to continue repurchasing shares under the previously announced share repurchase plan.

Guidance

Tyson believes that the fundamentals of the Beef, Pork and Prepared Foods businesses will remain strong in the fourth quarter of 2011, while it expects weak market pricing conditions to continue in its Chicken segment due to an imbalance of available supply relative to customer demand.

Further, the company expects its operational improvements and lower interest expense to continue in fiscal 2011. For fiscal 2011, the company reiterates its sales forecast to exceed $32 billion mostly due to price increases associated with rising raw material costs.

However, the company has reduced its capital expenditure plans to approximately $650 million from $700 million, as previously expected. Tyson further expects its 2011 net interest expense to be approximately $235 million.

Going ahead in fiscal 2012, Tyson anticipates export sales to continue, resulting in slight decline in total domestic availability of protein. In the Chicken segment, the company forecasts a slight decline in the industry production, whereas it expects increased raw material costs in the Prepared Foods segment, which will however be offset by the operational improvements and increased pricing. Tyson also anticipates strong fundamentals in the Beef segment, and expects strong export sales to continue in the Pork segment.

Tyson anticipates its capital expenditures to be similar to the fiscal 2011, and net interest expense to be $ 200 million in 2012.

We are encouraged by Tyson Foods’ significant presence in the international market. The company is vertically integrated and has advanced processing capabilities. However, the company faces stiff competition from both national and regional players like Smithfield Foods Inc. (SFD) and Pilgrim’s Pride Corporation (PPC).

We currently have a Zacks #3 Rank on Tyson shares, which translates into a short-term Hold rating. On a long-term basis, we provide a Neutral recommendation on the stock.

 
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