Tyson Is The Gift That Keeps On Giving

| About: Tyson Foods (TSN)

Summary

Entry into China well within its vision to maintain the industry lead.

Launch of online business will open up a new market in millennials and young middle-class.

Tyson stock recovers after tumble caused by class action suit.

Investment Thesis

In the Q1 earnings call, Tyson Foods Inc. (NYSE:TSN) announced exceptional performance in Year 2016, breaking records on earnings, cash flows and operating income. Taking advantage of high demand for popular products was key to achieving success. But will TSN withstand current legal woes?

Tyson saw good performance across all segments, with a total operating margin of 10.7% buoyed by strong results in the Beef and Pork segment. Q1 was the best quarter in the company's history, marking the fifth straight record year. Total revenue from high sales volume was $9.2 billion, with operating income growing by 27% from a year ago to $982 million. The announcement also was good news to shareholders, who saw EPS increase to $1.59 from $1.15 in Q1. It is instructive to note that TSN has consistently paid dividends for 15 straight quarters, effectively making it an essential part of a healthy portfolio. In the 2017 estimates, TSN raised its EPS guidance from $4.70-$4.85 to $4.90-$5.05.

By segments, the Beef segment posted operating income of $299 million at an operating margin of 8.5%. This segment is dependent on prevailing weather conditions and consumer pricing. These were, however, offset by high cattle supply. The Chicken and Prepared Foods Segment had operating income of $263 million with operating margin of 9.7%. TSN is keen on ramping up sales of popular products with higher margins. The strong demand in the export market for pork partially contributed to operating income of $247 million in the Pork Segment. TSN's competitors capitalize on pork exports to China, leaving TSN a hold on the domestic US market.

At the time of writing this article, TSN was trading at $65.05 with a market cap of $22.67 billion. It is the largest American processor and exporter of chicken, beef and pork. Its dominance of the beef market was secured by the acquisition of IBP, Inc. in 2001. In 2014, TSN made its most notable corporate move by acquiring Hillshire Brands Co.

At the moment, TSN is battling a class suit in which it is accused, along with several competitors, of manipulating chicken prices. The other defendants include Pilgrim's Pride Corporation (NYSE: PPC), Sanderson Farms, Inc. (NASDAQ: SAFM) and Koch Foods. Filed by Maplevale Farms, the suit alleges manipulation of the Georgia Dock Index, through conspiring "to fix, raise, maintain and stabilize the price of broilers" by coordinating their respective outputs and limiting production "with the intent and expected result of increasing prices of broilers in the United States."

Coming at a point at which the American consumer is cost-sensitive and economy unpredictable, such claims are likely to rock the company's fortunes - in this case TSN stock. On Monday after the SEC subpoenaed TSN, the stock dropped from $66.52 to $62.17. However, this has not dampened TSN's rise, as prices have since recovered.

Conclusion

TSN does seem to be focused on breaking barriers with emphasis on emerging markets. With China now the largest consumer of pork, TSN has tailored incentives meant to capture the enormous Chinese middle-class. In 2016, TSN introduced a smart code on chicken products that when scanned could display the time of slaughter and the shelf-life of the meat. This feature is especially key in a place like China where food safety concerns influence consumption of processed foods. Modern fast-paced lifestyles have left the modern consumer with little time to prepare food at home, and TSN has availed prepared frozen foods.

TSN has also made inroads into e-commerce by partnering with existing online sellers such as Alibaba (NYSE: BABA) and Amazon Fresh (NASDAQ: AMZN). Through the click-and-collect business model, TSN hopes to distribute fresh protein products through the new Tyson Tastemakers line.

Clearly, TSN has enough resources and is actively prepared to withstand the shifty economic environment brought about by politics and currency fluctuations. Further, TSN has prudently utilized free cash flows by repurchasing common stock for $520 million in Q1. The careful management of the balance sheet and maintenance of cash flow have made TSN a remarkable stock to buy and hold for long-term profitability.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Meat Products, Earnings
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