Tyson Earnings: Significant Cost Pressures Plague Profitability, but Impact Should Be Short-Lived

Our $103 per share valuation of no-moat Tyson TSN 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.

Tyson saw $13 billion in revenue against an anemic 0.5% adjusted operating margin (down from last year’s 8.9%), with low export demand in beef and pork amid rising economic uncertainty contributing to cost deleverage. Management cut its targets for fiscal 2023, now expecting $53 billion to $54 billion in revenue (previously $55 billion to $57 billion) against roughly breakeven adjusted operating margins in beef, chicken, and pork (previously low single digits). Our revenue forecast is in the new range, but our low-single-digit operating margin expectations will fall toward management’s targets given the margin pressures.

Tyson’s prepared foods segment was a bright spot, with management reiterating its 8% to 10% adjusted operating margin target (our forecast is 10%) after a 10.4% second-quarter mark (down 60 basis points from the prior year). While we are encouraged that Tyson’s more differentiated offerings fared better than the rest of its lineup, the segment accounts for less than 20% of revenue, leaving the remainder of the firm much more exposed to commodity market dynamics. Still, we believe Tyson’s performance can rebound as long-term protein demand should be supported by shifts toward healthier eating and rising international sales.