Tyson Foods: A Reliable Pick Amidst Coronavirus Uncertainty
- Tyson Foods is seeing retail volumes surge past the foodservice segment to reach ~66% of overall sales, although the increases in the former were insufficient to fully offset declines in the latter.
- The financial position is strong, further bolstered by a recent term loan agreement for $1.5 billion.
- The company's production capabilities will be severely tested in the coming months, but it has a great deal of flexibility in addressing the foodservice-to-retail shift in Q3-20 and beyond.
Tyson Foods, Inc. (NYSE:TSN) has had a rougher time than most of its peers, mostly on the back of recent news about more than one coronavirus outbreak at its manufacturing facilities. As the company continues to trade at nearly 30% down on a YTD basis and forward earnings multiple stands at under 15 as of this writing, it's a good time to think about adding to your position at these levels.
Thesis: Tyson Food certainly faces a tough year ahead because of global shutdowns resulting from the general COVID-19 situation as well as specific incidents in at least two of its facilities in the United States. Nevertheless, there are signs that the company will bounce back to pre-COVID-19 levels in terms of revenue growth and profitability, as evidenced by the recent upgrade by Sanford C. Bernstein & Co., LLC.
COVID-19 Situation at Tyson Foods
Early in May 2020, 257 of the total 1,282 employees and contractors at the Tyson Foods poultry facility in Temperanceville, Virginia, were tested positive for COVID-19. Toward the end of May, another 591 team members tested positive for the novel coronavirus at their Storm Lake, Iowa, pork processing facility. The company has released testing results for both facilities, the latter being released on June 2, 2020. TSN is proactively testing and releasing test results for coronavirus across several of its U.S. facilities.
Despite forced shutdowns and idling at several locations, Tyson Foods continues production, albeit at much lower levels. As a result of these production constraints that have affected more than a few of its 40 production locations across the U.S., revenues for the current quarter (Q3-20) are expected to be severely impacted. Nevertheless, Tyson Foods is committed to taking care of its employees, two examples of which are the revision of short-term disability pay to 90% of normal pay until June 30, and a doubling of the "thank you" bonus for frontline workers. As of the Q2-20 earnings call, the company "had no layoffs or furloughs, and have extended $120 million of bonuses and improved benefits to our frontline team members."
Q3 Indicators and the Post-COVID-19 Era
The best way to estimate TSN's future performance after the pandemic and its most drastic effects have passed on is to look at trends from Q2-20 and management comments on early third quarter observations at the Q2 earnings call.
Revenue grew by +4% on a YoY basis, of which 2.6% was attributed to volume increases and 1.6% to price increases. This was a period when COVID-19 was already making its impact felt on the retail and foodservice industries.
Of note is the fact that the company is witnessing a clear shift from foodservice to retail during the current quarter (Q3-2020). The retail portion of Tyson Foods' business experienced volume increases of up to 40% as Q3 plays out. Per the company's president, Dean Banks:
Our retail business remains strong and our core retail lines posted gains of more than 20% in the last 13 weeks, outpacing total food and beverage, as well as the top 10 food manufacturers. While panic buying has subsided from extreme levels, we continue to see 15% to 40% volume increases versus last year, depending on the category. As a result of these trends, we have successfully increased volume, margin and share within retail. Historically, approximately 45% of our total Company sales were the retail, 40% foodservice and 15% international. During early Q3, we saw our retail sales move to approximately two-thirds of our total Company sales.
However, he goes on to point out that the volume increases from retail were unable to completely offset the decline in foodservice, and the company expects YoY volume declines during H2-20. A positive offset is the 140% growth in eCommerce volume, a trend that Mr. Banks expects will continue, presumably through the remainder of the fiscal year 2020.
One important takeaway from the call was that the company's beef segment was able to innovate by pivoting from foodservice to retail with essentially the same products. The demand for beef both locally and for export is expected to be strong in the months ahead, with a strong focus on retail over foodservice.
Across the beef and pork segments, the company is seeing a similar trend of supply outstripping processing capability. Per Mr. Banks, this "could generate significant future margin potential."
Putting it all together, it seems that Tyson Foods expects retail and eCommerce growth to somewhat offset the decline in foodservice over the next two quarters. What matters is that its financial position is strong enough to help it tide over this difficult period until foodservice volume levels are back to normal.
One of the highlights of TSN's financial strengths is that it has reduced risks to cash flows by exiting four pension plans over a two-year period. In addition, during the first week of Q3, Tyson Foods entered a $1.5 billion term loan agreement that effectively "ensures financial flexibility and enables us to navigate potential uncertainties in the capital markets, while alleviating our reliance on the commercial paper market that typically serves as our primary means of short-term liquidity," per CFO Stewart Glendinning.
The company is also balancing its H2-20 CapEx with its minimum liquidity target of $1 billion and expects to remain "well above" that target, especially in light of the aforementioned term loan agreement. It also intends to reduce debt through Q3 and Q4 and has ruled out major share repurchases for the remainder of FY-20.
Right now, the major constraint seems to be production capacity rather than demand or even the skewed channel mix. To that end, the company is pushing to increase its production of case-ready pork, chicken, and beef, which will take up a significant portion of the $1.2 billion CapEx projection.
It's obvious that Tyson is cautious but well-prepared to dig in for a long-drawn-out recovery to normalcy. Its diverse portfolio, the proactive measures to bring employees back to work in a safe environment, its liquidity, and its balance sheet make ample allowances for a prolonged contraction of overall volume as the foodservice-retail skew continues through the next two quarters.
Recent historical performance on the revenue front shows that normalcy in the foodservice segment will very likely bring back positive growth, while simultaneously providing new opportunities in retail and eCommerce for its portfolio of retail-focused products. The future looks good for Tyson Foods from a lot of angles.
Even from a valuation standpoint, TSN looks more attractive than some of its peers in the consumer staples segment. But what makes Tyson Foods truly attractive to an investor should be the way the management team has treated its 140,000+ employees during this difficult period. At a time when unemployment is high and furloughs are the order of the day, Tyson has been steadfastly loyal to its employees. At the end of the day, that intangible quality counts for a lot more than revenues and profitability - although Tyson Foods has shown that it is more than capable of sustained growth in those two critical areas as well.
The only major risk to be aware of is an unexpectedly prolonged period of new COVID-19 positive cases remaining at high levels. That's a definite possibility because of a collective public disregard for social distancing norms across the country as it rages against the death of George Floyd.
Looking at all possible angles with as practical a viewpoint as possible in an excessively unpredictable situation, TSN represents a solid investment for the long term. Don't expect to see a lot of capital appreciation over the next few quarters, but do expect the company to be able to adapt to the new normal when the time comes. Eventually, the current as-of-this-writing price of around $63 should bounce back to pre-coronavirus levels of between $80 and $90. Bernstein has a price target representing a near-40% upside, and my take is that they won't be far off the mark.
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