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(Reuters) - Tyson Foods Inc's (TSN.N) first-quarter profit blew past Wall Street estimates and the meat processor said it expects beef margins to recover in the back half of the year, helping to send its shares up more than 5 percent.
The U.S. cattle herd shrank for the fifth straight year in 2011, to a 60-year low, as a devastating drought and record-high feed costs hit production.
The shrinking beef supply has raised costs for buyers like Tyson, the No. 1 U.S. meat processor, and McDonald's Corp (MCD.N). At the same time, slack consumer demand has made it difficult to pass on the full extent of those cost increases, putting pressure on margins.
"Our beef segment is experiencing a rough patch as a result of challenging market fundamentals," said Tyson Chief Executive Donnie Smith on Friday.
He later joked with reporters that "rough patch" was a euphemism for "margin compression."
"Although we are still outperforming industry indexes, if current conditions continue, our beef results will be pressured in our second quarter," Smith added.
Still, Tyson said beef would be profitable for the full fiscal year, due to expectations that beef margins will return to a "normalized range" in the second half.
That forecast was surprising considering that beef industry trends have been worsening, said JP Morgan analyst Ken Goldman. But he also praised Tyson's diversity of business, selling chicken, beef, pork and prepared foods.
"Today's results illustrate why Tyson deserves a premium multiple, in our opinion, to many of its protein peers," Goldman said in a research note.
"When one segment suffers, others can come to the rescue, leading to much smoother and less volatile earnings" than those of other meat companies like Smithfield Foods SFD.N, Pilgrim's Pride PPC.N and Sanderson Farms (SAFM.O).
Beef is Tyson's largest unit, accounting for nearly 42 percent of sales in the latest quarter, followed by chicken with 33 percent of sales.
While beef was the biggest sales contributor, it delivered the lowest operating profit as a percentage of sales among Tyson's four units. Beef operating income was $31 million, or 0.9 percent of first-quarter beef sales. Pork operating income was $165 million, or 11.2 percent of pork sales.
Tyson shares were up 5.2 percent at $19.58 on Friday afternoon on the New York Stock Exchange.
Tyson also said its chicken segment returned to profitability in the quarter, despite higher feed costs. It also cited strong performance in its prepared foods business.
Tyson reported on Friday that net income fell to $156 million, or 42 cents per share, in its fiscal first quarter, ended December 31, from $298 million, or 78 cents per share, a year earlier.
Analysts on average were expecting 33 cents per share, according to Thomson Reuters I/B/E/S.
Sales rose 9.4 percent to $8.33 billion, matching analysts' estimates. Sales volume fell 5 percent as the company processed less meat in anticipation of reduced demand.
Average prices rose 14.6 percent due to price increases meant to offset higher commodity costs and increased sales of higher-priced items.
The company stood by its 2012 forecast calling for sales to exceed $34 billion, helped by price increases related to tighter meat supplies and higher raw materials costs. Still, the company expressed caution about its prior earnings forecast, which called for full-year profit in excess of $2 per share.
"We still feel pretty good about coming in around the $2 mark, but we think it would be overly optimistic to say 'in excess of' at this point, because of the headwinds we're facing in beef, not to mention the volatility in the grain markets," Smith said.
Because exports are likely to remain strong, Tyson expects total domestic availability of meat -- including chicken, beef, pork and turkey -- to be down 2 percent to 3 percent from 2011, which it said should support higher prices.
Reporting By Martinne Geller in New York; Editing by Lisa Von Ahn, John Wallace and Matthew Lewis