Supply and Demand Work in Tyson’s Favor Again in Q2, but Shares Appear Fairly Valued

No-moat Tyson Foods reported fiscal second-quarter sales growth of 16%, in line with our estimate, driven entirely by price/mix, with a 1.5% drop in volume. Unlike many packaged food firms, which are experiencing margin compression due to lags in implementing cost savings and price increases to offset inflation, Tyson’s unique business produced adjusted gross and operating margin increases of 220 and 230 basis points, respectively, to 13.3% and 8.9%. Tyson is experiencing labor shortages (like most firms), causing a bottleneck in the animal processing supply chain. This has resulted in an abundance of livestock (pushing Tyson’s cost down) and a shortage of processed meat cuts (raising its selling prices), more than offsetting inefficiencies from running plants at reduced capacity. Tyson is working hard to attract employees, raising wages, offering unique benefits such as on-site healthcare and childcare, transportation, educational reimbursement, and assistance securing U.S. citizenship. These investments are being funded by $1 billion in savings to be realized in fiscal 2022-24, which are progressing ahead of schedule, with Tyson now expecting to save $400 million in fiscal 2022, up from $300 million-$400 million previously. Tyson’s recruiting efforts are bearing fruit, with staffing and employee turnover improving, and we expect Tyson to return to a fully staffed position and normalized 8% operating margin by next year.