Company Reports

Tyson primarily sells raw beef, pork, and chicken, although it has increased its exposure to prepared foods. Despite the scale it has amassed (with a sales base that exceeds $53 billion), meat is a commodity and carries little to no brand or pricing power, exposing sellers to volatility in both costs and revenue. Tyson’s strategy to sell three meats is intended to offer diversification. But diversification has its costs, and the headwinds of any one meat have weighed on companywide results at times. Additionally, we think there’s limited revenue or cost synergies across different proteins.

We don’t expect to make a material change to our $82 per share fair value estimate for no-moat Tyson after our initial review of its first fiscal quarter. We think this quarter’s results are signaling the cyclical recovery for Tyson’s chicken and pork businesses and don’t see any changes to the long-term fundamental supply and demand dynamics.

Tyson primarily sells raw beef, pork, and chicken, although it has increased its exposure to prepared foods. Despite the scale it has amassed (with a sales base that exceeds $53 billion), meat is a commodity and carries little to no brand or pricing power, exposing sellers to volatility in both costs and revenue. Tyson’s strategy to sell three meats is intended to offer diversification. But diversification has its costs, and the headwinds of any one meat have weighed on companywide results at times. Additionally, we think there’s limited revenue or cost synergies across different proteins.

We expect to trim our $85 per share fair value estimate for no-moat Tyson by a low-single-digit percentage as weakness in beef and pork is likely to linger longer than we thought. Still, we don’t see any changes to the fundamental supply and demand dynamics and expect an eventual return to better profitability as the cycle progresses. Specifically, our long-term outlook for low-single-digit percentage annual revenue growth and a return to mid- to high-single-digit adjusted operating margins compares favorably to fiscal 2023’s sales growth and margin of negative 1% and 2%, respectively. Shares trade significantly below our fair value estimate and offer an attractive risk-adjusted upside, as well as a 4% dividend yield.

Tyson primarily sells raw beef, pork, and chicken, although it has increased its exposure to prepared foods. Despite the scale it has amassed (with a sales base that exceeds $53 billion), meat is a commodity and carries little to no brand or pricing power, exposing sellers to volatility in both costs and revenue. Tyson’s strategy to sell three meats is intended to offer diversification. But diversification has its costs, and the headwinds of any one meat have weighed on companywide results at times. Additionally, we think there’s limited revenue or cost synergies across different proteins.

We don’t anticipate changing our $85 per share fair value estimate for no-moat Tyson after reviewing its preliminary fiscal third-quarter earnings release. Shares were down 4% after the report as the market focuses on continuing weak profitability across many of Tyson’s businesses on a year-over-year basis. However, we think this view overemphasizes near-term earnings projections and overlooks sequential improvement. We do not see any structural changes to its end markets that would alter our long-term outlook for low-single-digit percentage annual revenue growth and a return to mid- to high-single-digit adjusted operating margins. Shares trade significantly below our fair value estimate and offer an attractive risk-adjusted upside as well as a 3.4% dividend yield.

We see value in no-moat Tyson Foods’ shares, now sitting in 5-star territory, well below our $85 fair value estimate. We think the current price implies that challenging operating conditions will linger. Meat markets are cyclical, and a return to a more normal backdrop would justify our valuation. Further, we don’t see any structural changes that would warrant a permanent change to profitability.

We are lowering our fair value estimate for Tyson Foods to $85 from $96, which implies a 36 times 2024 EPS multiple and an enterprise value to 2024 adjusted EBITDA of 13 times. Multiples are elevated due to depressed earnings from near-term headwinds. The decrease comes mostly from a more gradual recovery from near-term headwinds than we previously forecast. This includes a top-line growth rate of about 2.3% per year, down from 2.5%, as well as a more gradual recovery to our midcycle 7.5% operating margin forecast.

Tyson primarily sells raw beef, pork, and chicken, although it has increased its exposure to prepared foods. Despite the scale it has amassed (with a sales base that exceeds $53 billion), meat is a commodity and carries little to no brand or pricing power, exposing sellers to volatility in both costs and revenue. Tyson’s strategy to sell three meats is intended to offer diversification. But diversification has its costs, and the headwinds of any one meat have weighed on companywide results at times. Additionally, we think there’s limited revenue or cost synergies across different proteins.

Several secular trends are affecting Tyson’s long-term growth prospects. While U.S. consumers are limiting their consumption of red and processed meat (67% of Tyson’s sales), they are consuming more chicken (32%). International demand for meat has been strong, and although Tyson’s overseas sales mix is just 15%, it is likely to increase over time, as this is an area of investment.

Our $103 per share valuation of no-moat Tyson should fall by a high-single-digit percentage in the wake of its second-quarter earnings announcement, which included significant profitability pressure borne of high costs and sluggish demand. Our reaction is more muted than the shares’ midteens percentage plunge, likely because we view the strain as transitory, a consequence of a volatile cost and pricing environment. We do not plan large changes for our long-term outlook (low-single-digit annual percentage revenue growth, mid-single-digit adjusted operating margins). With prevailing sentiment apparently fixated on current-market dynamics, the shares seem attractive for long-term investors willing to shoulder near-term volatility.

Several secular trends are affecting Tyson’s long-term growth prospects. While U.S. consumers are limiting their consumption of red and processed meat (67% of Tyson’s sales), they are consuming more chicken (32%). International demand for meat has been strong, and although Tyson’s overseas sales mix is just 15%, it is likely to increase over time, as this is an area of investment.

We think the combination of oversupply and external factors (higher protein costs and availability) worked against no-moat Tyson in its first quarter, plaguing margins. In fact, gross and operating margin sank 830 and 770 basis points, respectively, to 7.3% and 3.4%. Despite such disappointing results, we believe Tyson’s ongoing productivity initiatives (targeting $300 million-$400 million in savings in fiscal 2023, on top of $700 million achieved in fiscal 2022) should enable it to weather the inherent volatility in the protein industry while affording the fuel to invest in labor and automation longer term. While we intend to adjust our near-term forecast based on its recent marks, which should take our $106 fair value estimate down by a low-single-digit percentage, shares still look attractive at a roughly 40% discount to our intrinsic valuation, even after a 5% pullback on the print.

Several secular trends are affecting Tyson’s long-term growth prospects. While U.S. consumers are limiting their consumption of red and processed meat (67% of Tyson’s sales), they are consuming more chicken (32%). International demand for meat has been strong, and although Tyson’s overseas sales mix is just 15%, it is likely to increase over time, as this is an area of investment.

After no-moat Tyson’s fiscal fourth-quarter results, we don’t plan a material revision to our $102 fair value estimate, leaving shares attractively valued. We think the stock will gravitate toward our valuation in time, as savings lead to improved margins in the chicken and prepared food segments, despite a pullback in the beef division.

Several secular trends are affecting Tyson’s long-term growth prospects. While U.S. consumers (81% of fiscal 2021 sales) are limiting their consumption of red and processed meat (71% of Tyson’s sales), they are consuming more chicken (29%). International demand for meat has been strong, and although Tyson’s overseas sales mix is just 12%, it is likely to increase over time, as this is an area of investment.

Several secular trends are affecting Tyson’s long-term growth prospects. While U.S. consumers (81% of fiscal 2021 sales) are limiting their consumption of red and processed meat (71% of Tyson’s sales), they are consuming more chicken (29%). International demand for meat has been strong, and although Tyson’s overseas sales mix is just 12%, it is likely to increase over time, as this is an area of investment.

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.

Several secular trends are affecting Tyson’s long-term growth prospects. While U.S. consumers (81% of fiscal 2021 sales) are limiting their consumption of red and processed meat (71% of Tyson’s sales), they are consuming more chicken (29%). International demand for meat has been strong, and although Tyson’s overseas sales mix is just 12%, it is likely to increase over time, as this is an area of acquisition focus.

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.