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With $40 billion in annual revenues, Tyson Foods (TSN) is a powerhouse in the packaged food and edibles space. The company boasts preeminent brand names ranging from Hillshire Farms, Ballpark Franks, and Tyson chicken. With formidable capital appreciation, an appealing dividend yield of 2.53%, and a consumer defensive business, the stock is worth an in-depth examination to discuss its investment suitability. This article will provide my investment thesis on TSN discussing business strengths, valuation, growth, and relevant financials in order to render a buy or sell rating.
TSN offers investors a great investment opportunity that helps mitigate portfolio downside risk, offers increasing income through dividends, and provides a stable long-term outlook. TSN's demonstrates distinct business advantages ranging from inelastic demand for the company's food products, significant scale advantages, and great operational oversight. TSN is one of the largest global processors of chicken, beef, and pork with operations in over 125 countries. The food giant has a formidable brand portfolio with dominant brands ranging from Hillshire Farms, Ballpark Franks, Sara Lee, Jimmy Dean, and Tyson chicken.
The company's revenues originate from five operating segments ranging from chicken, beef, pork, prepared foods, and others with the following respective revenue weightings (30.1%, 38.6%, 8.9%, 21.6% and 0.8%). TSN has continued to diversify its food staple offerings and broaden the company's exposure to the packaged food market through a number of acquisitions in different food areas. In 2016, TSN acquired Hillshire brands, a large manufacturer of mass branded meat and bakery products and in 2017 TSN acquired Advance Pierre Food Holdings, a distributor of ready to eat sandwiches and entrées, and snacks. Continued operational focus on diversifying the brand will extract significant benefits as it will help expand revenues and mitigate pricing difficulties in specific food markets.
TSN's portfolio is inextricably linked to the compulsory food preferences of consumers, assuring a stable and highly defensive revenue generation model. Another beneficial element of TSN's revenue model is substantial vertical integration as the company's controls every facet of production from raising livestock to processing, packaging, and dressing the meat items into prepared and packaged goods. This enables TSN to directly control costs, efficiently manage production, and provide consumers with a diverse array of food items.
From an operational standpoint, TSN benefits from capable managerial oversight. Despite being one of the largest protein food producers in the world, TSN has been able to efficiently scale its operations to meet growing food demand. TSN has witnessed almost inelastic revenue expansion, elevated gross and net profit margins, and depressed COGS expenses (as a percent of total revenues). Over the past couple of years, the company has driven meaningful bottom line improvement, decreasing cost of goods sold expenditures from 93% of total revenues to 87%; TSN has also increased its gross margin to 12.8%, and net profit margin to 7.5%.
From a fundamental perspective, TSN will derive persistent revenue growth from an ever-growing global population (the global population is expected to reach 9.8 billion people by 2050) and the company will also benefit from a number of strategic growth vectors ranging from continued cost efficiency initiatives and emerging market growth from rapidly industrializing countries. TSN sells their products in more than 115 countries, with operations in Brazil, China, New Zealand, the Philippines, India, Japan, Argentina, The Dominican Republic, the Netherlands, Russia, Spain, Turkey, the United Kingdom, Venezuela, and Mexico. Although TSN's revenues from international sales comprise only $4.8 billion or 12% of annual revenues, the company has and will consistently drive growth in its international segment.
From an investment returns perspective, TSN has proven to be a highly lucrative investment holding as a result of sustained capital appreciation and consistently elevated dividend payments. Over the past ten years, TSN has sustained formidable share price appreciation of 593% and the company has consecutively increased its dividend yield for the past 7 consecutive years. TSN currently offers an attractive 2.53% dividend yield with a very moderate payout ratio of only 26%. This offers TSN a large growth runway to continually expand its dividend yield. In addition to a stable dividend, TSN has continued to generate more free cash flow, further reinforcing the notion of a promising dividend payer.
TSN displays an adequate financial positioning. The company exhibits an inverse relationship between asset expansion and total outstanding liabilities. However, TSN displays rather low liquidity reserves of $270 million compared to a significant debt burden of $9.9 billion. In spite of being farther out on the leverage curve, TSN's long-term debt is manageable as it is well covered by operating cash flow, at roughly 23% coverage of total debt.
TSN exhibits a history of continued acquisitions which adds to the debt burden, but the company has effectively managed its debt obligations in the past, reinforcing a more stable financial outlook. From a valuation perspective, TSN is significantly undervalued. Based on a discounted cash flow valuation, the stock's current share price of $59.29 is far below the future cash flow value of $98.13, making the stock a very appealing investment opportunity.
TSN persists as a phenomenal investment holding. The company's consumer defensive business, stable growth outlook, and significant competitive advantages reinforce a well-positioned business. The stock offers strong investment appeal as a result of its high capital appreciation, good dividend yield, and consumer defensive nature. Additionally, TSN is significantly undervalued allowing investors a great entry point.
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Disclaimer: Please note that this is not a solicitation to buy or sell any security. Data is for illustrative purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are not tailored to individual portfolio needs nor investment objectives. The assessment of a given security is based on my own model portfolio, which is presented solely for educational purposes. Yanni Lodato is an individual investor and author, not an investment adviser. Readers should always engage in further research and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or qualified attorney before making any investment decisions.
Disclosure: I am/we are long TSN. 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.