Tyson Foods Inc
Tyson Foods is one of the world's largest processors and marketers of chicken, beef and pork with a presence in more than 80 countries. Brands include Tyson, Thomas E Wilson, ITC, Wright Brand, Russer, Jordan's, Continental Deli and Iowa Ham. In recent months, Tyson has struck a number of deals in overseas markets, including a joint venture in China in which it holds a 70% stake.
World's largest processor and marketer of chicken and pork.
Range of strong brands.
One of the most efficient companies in the sector, as defined by its cash conversion cycle.
Overwhelming majority of company's revenues come from the US.
Profits dependent on favourable commodity prices.
Significant exposure to beef sector, which is forecast to underperform livestock sector supply and demand estimates.
Constant product innovation.
Further expansion into emerging markets, with a focus on China and India and their strongly growing poultry and pork markets.
The volatility in commodity costs in particular is expected to remain a challenge for the foreseeable future.
High consumption per capita in the US and more subdued than expected export demand from outside could negatively impact revenues.
|Tyson On Top|
|Select Companies - Share Price Performance YTD (%)|
Tyson's earnings per share (EPS) came in at US$0.27 for Q213, almost 50% lower on a year-on-year and quarter-on-quarter basis. In our last company profile on Tyson Foods, we stated that the key growth area for the company in terms of revenues will be in the poultry segment, largely because of improving domestic demand and competitive prices. Indeed, this view played out, as the company's poultry operations (which generally comprise almost 40% of total sales) has shown the strongest sales growth in H113. The improved sales were largely driven by the increase in prices over that time. On a volume basis, poultry sales increased by only 0.1% in Q213, yet poultry was still the only division to show an increase in sales volume. The company's beef operations (which comprise 43% of all sales) had predictably poor results, with sales growth increasing by only 1.5% in H113 and operating income coming in negative.
|All In Positive Territory|
|Tyson - Select Earnings Measures (US$)|
In the coming quarters, we are maintaining our view that Tyson will outperform in terms of EPS, and see poultry sales as the main driver of revenue growth in the coming quarters. Historically, Tyson has posted strong results in Q3, and we believe lower grain prices over the reporting period (March to June) will help improve operating margins. We believe the beef sector will underperform, as cattle production remains subdued in the wake of high feed prices, and consumer demands remains pedestrian at best. Like the company, we believe that pork sales will come in somewhere in the middle of these two segments. Overall, however, we believe sales growth will remain comparatively slow and that margins will remain low until cattle supplies improve and input prices fall.
|More Gains In The Offing|
|Tyson Share Price (US$) & S&PGS Grains Index (Axis Inverted)|
Within the livestock industry, Tyson continues to have arguably the best fundamentals, and we expect this to continue over the medium-to-long term. It has had positive cash flow from operations every year since 1987, and has one of the industry's lowest operating cycles, implying strong efficiency. After paying off a large portion of its debt in Q312, the company now no longer has any significant debt repayments due until at least October 2013, and boasts a debt/EBITDA ratio below one for the current fiscal year and an interest coverage ratio of 3.5. By comparison, the industry average (ex-Tyson) is less than 3. The company also has a wide range of brands and is increasingly expanding its poultry division both within the US and globally. We believe this makes sense, as we forecast poultry consumption to outperform both beef and pork due to price competitiveness.
|Less Emphasis On Beef|
|Tyson Foods - Revenues By Product (%)|
Although we expect Tyson to be an outperformer among beef producers in the coming quarters, we believe the company's results will be subdued overall during that time due to its current reliance on revenues from the beef segment and changing trends in meat consumption. Since 2002, Tyson has derived the majority of its revenues from the beef sector, the underperformer for production and consumption growth in the US over the long term, according to our forecasts. Furthermore, since 2008, US meat consumption has been falling in nominal terms for four consecutive seasons, after rising every season since 1950. Given the country's expanding population, the key reason for the decline in all meat consumption is high meat prices and changing lifestyles.
|Tyson Near The Top|
|Select Companies - T12M EPS (US$)|
In theory, Tyson could be well positioned to capitalise on a potential second wave of consolidation in the industry (after the first wave in the wake of the 2008 global financial crisis). The company has some of the lowest debt levels in the industry, current US borrowing costs are near record lows (facilitating debt issuance), and it is present in nearly all levels of the supply chain, potentially reducing integration costs, especially in the poultry segment. Furthermore, the company's capital expenditure/depreciation ratio has been expanding in recent quarters, reversing a downtrend seen between 2005 and 2007, signifying interest in expansion.
|Replacing Their Assets|
|Tyson Foods - Ratio Of Capex/Depreciation|
However, other companies in the sector (notably JBS and Marfrig) have pursued expansion through acquisition and in some cases have had difficulties remaining profitable, even though sales growth exploded (both companies lost money in FY2010 and FY2011). Instead, it appears that Tyson is using its extra funds to conduct share re-purchases and issue larger dividends (dividend/share increased by 25% in Q113 and the company also issued a special dividend of US$0.10/share). Among acquisitions, it appears that Tyson is interested largely in acquiring small regional players, perhaps trying to avoid the aggressive strategies that resulted in high debt levels in its key competitors. Ultimately, Tyson will remain an outperformer in the industry over the long term due to its efficiency, cost control, and greater emphasis on poultry, although compared with the rest of the S&P 500 it could be an underperformer in the coming years.
|In A Downtrend|
|US - Total Meat Consumption ('000 tonnes)|
Tyson has been one of the strongest performers relative to its index among major agricultural producers in the year-to-date, and yet remains one of the most undervalued companies on an EV/EBITDA basis. Tyson has outperformed its benchmark index (the S&P 500) by 10% since January, one of the best performances by a company based outside of Brazil (JBS outperformed the Bovespa Index by 21.5% over the same period). The price/earnings (P/E) ratio for Tyson is close to long-term averages around 11x, despite the fact that the company's share price is approaching all-time highs and its EV/T12M EBITDA ratio, at 6.4x, is below the livestock industry average. We believe these ratios will remain low by industry standards, and believe the share price is fairly valued at this point. As the company continues its share repurchase program (28mn shares remain authorised for repurchase out of roughly 360mn common shares), the company's P/E ratio looks set to increase in the coming quarters.
|Tyson Near The Bottom|
|Select Companies - EV/EBITDA Ratio|
We see potential for short-term consolidation of Tyson's share price around the US$25 level, as the recent upward momentum of the share price appears to be slowing. The share price is also approaching a triple top at that level, a break above which would see the share price reach new highs. However, we believe the share price is overstretched, as indicated by the weekly relative strength index, which remains in oversold territory. We believe a sustained break below the 14-week moving average would see the share price test the next line of support around US$22. We believe a break of this level would see prices approach US$20.
|Tyson - Share Price, US$ (Weekly Chart) With 14-Week Moving Average & RSI (Below)|
|Note: Margins in %. Sources: BMI, Bloomberg|
|Interest Coverage Ratio||1.7||1.1||4.4||5.3||3.5|