Tyson Foods (NYSE:TSN) is the largest protein processor in the United States and its common stock offers a good investment opportunity. Many of the company's fundamentals and valuation measures are attractive compared to similar publicly traded companies. Tyson is well positioned to meet changes in tastes for meat as the company is diversified across the major meat types (poultry, pork and beef), its profit margins are normalizing, and it is continuing to innovate and invest in value-added businesses, which could bring even more shareholder value in the future. Overall, Tyson could see improvements in its business due to these major trends:
Swings in consumption - Tyson is the largest provider of meats to the quick service restaurants, which are constantly reinventing their menus - also, despite a sluggish economy consumers are not reducing meat consumption but moving to poultry from red meats;
Growth in higher margin value-added poultry and prepared foods; and
Growth in international poultry - the company is investing in China, Mexico is strong and Brazil is exporting into Europe.
Valuation and fundamentals
Tyson has 354.5 million shares outstanding of which 284.5 million are A shares and publicly traded, with the remaining 70 million B shares held in a trust formed by descendants of Tyson's founder, John Tyson. Tyson is the largest publicly traded meat processor and marketer in the United States and the second largest in the world (behind only Brazilian JBS SA). A significant number of its outstanding shares are controlled by insiders and the company is shareholder friendly.
It returns cash in the form of dividends and share repurchases. In its first 2013 fiscal quarter that ended on December 31, 2012, it repurchased 5.1 million shares for $100 million and paid a special dividend of $0.10 per share in November of 2012. The 2012 dividend yield based on recent share prices is 1.1%. The company is likely to continue its share repurchasing and dividend payment as it has nearly $2 billion in liquidity, significantly above its targeted range of liquidity of $1.2 to $1.5 billion. Below is a table that compares valuation and fundamental measures of Tyson and its major publicly traded competitors Smithfield Foods (NYSE:SFD), Hormel Foods (HRL) and Pilgrim's Pride (NASDAQ:PPC).
Enterprise value [EV]
International sales %
1 year total return (a/o April 5, 2013)
Source: Capital IQ, Thomson Reuters, SEC-filed annual reports, author's calculations.
EBITDA: earnings before interest, taxes, depreciation, and amortization.
CFO: cash flow from operations.
*consists of 12% in exports from the U.S. and less than 10% from foreign production.
As seen from the above table Tyson has one of the largest international exposures, which is also growing due to the recent expansion into poultry in China. Also, Tyson has one of the best cash flows from operations in the industry and its stock is among the cheapest based on such measures as price-to-sales, price-to-value, and price-to-earnings-to-growth. On the negative side, its EBITDA margin is the lowest but the company has communicated to investors that it expects margin normalization in the second half of 2013 and into 2014.
Smithfield and Pilgrim's Pride process primarily pork and poultry meat, respectively, and Hormel is primarily a seller of processed and value-added pork and poultry meat. Tyson has the diversification advantage as it provides the commodity raw pork, poultry and beef as well as value-added processed meat. This is an advantage because there are often meat scandals that hit a particular type of meat such as "mad cow," "avian flu" and "swine flu." Also, consumer preferences often change between the three major meat categories but rarely consumers abandon meat entirely. All that allows Tyson to reduce its sales volatility and shift resources to the most trending meat.
Another advantage for Tyson is that its large size allows it to have 3,390 chicken related facilities (including processing and rendering plants, blending and feed mills, breeder and broiler farm houses, and broiler hatcheries), 12 beef and 9 pork producing facilities as well as 17 distribution centers and 81 cold storage facilities. Transportation costs are some of the largest costs that meat producers incur and strong geographic presence is crucial for a company operating in this industry.
For comparison, Smithfield had 25 pork related facilities in the U.S. and 6 international facilities. Hormel had 7 harvest and processing plants, 31 processing plants, 12 distribution facilities, 6 hog production facilities, 3 hatcheries, 11 feed mills, and 1 turkey farm for a total of 71 production and distribution related facilities. Finally, Pilgrim's Pride operates 29 processing plants, 8 prepared foods cook plants, 30 feed mills, 9 rendering facilities, 3 pet food processing factories, and 14 distribution centers. It is clear that Tyson has the largest geographic reach in the U.S., which should help in controlling transportation costs. Tyson and Pilgrim's Pride have vertically integrated poultry processes and Smithfield is the only vertically integrated pork producer. Vertical integration allows companies to better control the entire production process and they usually benefit when prices are rising.
Perhaps the most important thing that distinguishes Tyson from its competitors is the depth and breadth of its initiatives. Tyson is responding to the demand for healthier lunch meats and is currently in the process of a multi-million upgrading of its Houston lunch meat plant. The company is focused also on providing healthier school lunches as evident from its k-12 initiative. Also, Tyson has its own award winning private fleet, Tyson Transportation, that has recently partnered with Burns Logistics and with another consumer product company, Coca-Cola (NYSE:KO). In addition, Tyson is offering new and innovative products such as lower sodium and no-MSG and whole-muscle texture deli hams, new products made from dark chicken meat, and new chicken wing flavors.
Tyson's common stock offers a good entry point at current valuation levels. The company's focus on innovation, creation of shareholder value, and international growth bode well for equity investors. In addition, Tyson has a solid balance sheet and is a leader in an industry where size matters. It is likely that Tyson will continue to supply both proteins and good investment returns for the foreseeable future.