Tyson Foods Starts Off FY 2015 On The Right Foot

Summary

• Tyson Foods benefited from low input costs and high product prices.
• The company is paying down long-term debt to reduce interest expense.
• TSN pays a small but sustainable dividend.

On Jan. 30, meat and poultry company Tyson Foods (NYSE:TSN) came out with its Q1 FY 2015 earnings announcement and 10-q. The company had a robust quarter due to some favorable conditions. Let's take a look to see what's going on with it.

Revenue and profitability expansion

In the most recent quarter, Tyson Foods saw its revenue, net income and free cash flow increase 24%, 22% and 163% respectively year-over-year. Tyson Foods essentially sells commodities, such as chicken, pork and beef products, built on other commodities, such as corn or grain based feed products. This means that it is a price driven business affected by the supply and demand balance of both components.

In the case of Tyson Foods, it benefited from the increased price of its products due to higher demand and/or lower supplies. Moreover, the glut of corn contributed to the decrease of feed costs (see chart below). Chicken and pork both experienced increases in demand while beef experienced supply constraints due to a "reduction in live cattle processed".

US Corn Farm Price Received data by YCharts

Tyson Foods' acquisition of Hillshire Brands also contributed heavily to top and bottom line expansion, especially in the prepared foods segment. In the most recent quarter, Tyson Foods' prepared food segment saw year-over-year gains of 90% in volume. This segment also benefited from price increases.

Improving balance sheet

One of the things I like about Tyson Foods is that it is working on improving its balance sheet. The company reduced long-term debt by $650 million or 8% year-over-year. This brings the company's long-term debt down to 76% vs. 85% the same time last year which is an improvement, but still lies above my personal threshold of 50%. The reason for this action is simple-Tyson Foods assumed some of the debt of Hillshire Brands. Operating income still adequately covers interest expense by 6.6 times. The rule of thumb for safety lies at five times or more.

Tyson Food's cash position remained roughly on par with the same quarter last year. Its $381 million in cash equated to a mere 4.2% of stockholder's equity vs. 4.9% the same time last year. I like to see companies with cash amounting to 20% or more of stockholder's equity to get them through rough times.

Dividend is small but sustainable

I like to gauge dividend sustainability by comparing how much a company pays out relative to its free cash flow-the true measure of profitability in my opinion. I like to see companies pay out less than 50% of free cash flow in a full year and retain the rest for reinvestment back into the business.

In 2014, Tyson Foods paid out a reasonable 19% of its free cash flow in dividends. In the most recent quarter the company only paid out 6%. Currently, the company pays its shareholders $0.40 per share per year translating into a yield of 1%.

Looking ahead

In FY 2015, company management believes that input costs will decrease further due to heightened production of grain helping hog and cattle producers. They also expect chicken demand to be robust and beef supplies to be further constrained. Synergies from the Hillshire Brands acquisition should also contribute further to profitability expansion.

According to Morningstar, Tyson Foods trades at a P/E ratio of 16 vs. 18 for the S&P 500. This makes it undervalued relative to the market. I am bullish on Tyson Foods as long as its operating income adequately covers its interest expense, it continues to keep long-term debt under control and demand remains robust.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.