Analyst Note| Rebecca Scheuneman, CFA |
Widespread costs to contain COVID-19 and inflation across hogs, chicken, feed, labor, and freight are materially increasing expenses for no-moat Tyson, squeezing profit margins in most of its segments. Even so, in its fiscal second quarter, Tyson enjoyed 7.5% higher selling prices in beef, the firm’s largest segment at 41% of operating profits over the last three years, which more than offset this inflation, resulting in a 190-basis-point increase in Tyson’s consolidated second-quarter adjusted operating margin, to 6.5%. In the next few quarters, Tyson should be able to raise prices in its pork and prepared food segments (41% of profits), allowing these segments to return to normalized margins of 8% and 12%, respectively, by fiscal 2022, from 5% and 10% in the quarter. But chicken (18% of profits) has suffered from executional missteps over the past few years that have resulted in structurally higher costs relative to competitors, and we now think this business will experience 7% long-term operating margins, from 8% previously. We do not fault Tyson for industrywide headwinds, such as labor shortages, a drop in hatchability when February storms resulted in widespread power outages, and grain inflation. But Tyson is also experiencing self-inflicted wounds, such as production inefficiencies, poor customer service levels, an out-of-balance buy-versus-grow strategy that is forcing the firm to buy expensive meat on the open market, and hatchability problems prompting the firm to switch out all male birds over the next year.