Tyson’s Inflated Beef Margins Normalizing as Supply and Demand Come Into Balance; Shares Compelling

No-moat Tyson’s fiscal third quarter marked an inflection, with the company realizing its first year-over-year decline in an adjusted operating margin since the outset of the pandemic, when a spike in COVID-19 cases in Tyson’s beef plants caused a supply-demand imbalance that worked in the company’s favor. Consolidated adjusted gross and operating margins contracted 170 and 340 basis points, respectively, to 11.7% and 7.4%, below our long-term forecast of 13% and 8%. Beyond the normalization of the beef (38% of fiscal 2021 sales) margin, prepared foods (19% of sales) experienced profit pressure from the loss of food service contracts (gradually being replaced) and inefficiencies from labor shortages, which should fully resolve in the fourth quarter, as Tyson has made significant investments in employee wages and benefits, helping margins return to the long-term trend.