WHGLY - Tyson Foods: This Middling But Mighty Meat King Offers Superior Safety And Security

2023-04-27 12:00:17 ET

Summary

• In two previous articles, I compared Tyson Foods somewhat negatively to two large meat-production peers.
• In this article, I want to make the case for why this meat king is still a worthy investment, despite my unfavorable comparisons.
• Due to the increased safety and lower risk Tyson offers compared to its peers, I think long-term value investors should consider buying this name.

Introduction

After a celebration in which I gorged myself on well-cooked meat, I was inspired to write about three stocks on my watchlist that I call "the meat kings." These three stocks are of publicly-traded companies that are each well-known for producing industry-leading quantities of a particular type of meat.

The first article was about WH Group Limited ( WHGLY ) ( WHGRF ), the pork king. In that article, I explained why I consider the company a buy despite it breaking a firm rule I have about not investing in companies in illiberal nations (a rule I adopted based on thorough research I cited in a different article on emerging markets). The second article was about JBS S.A. ( JBSAY ) ( JBS ), the beef king. In that article, I explained why I thought the company was a worthwhile investment despite its lumpy financials, high debt load, and unsustainable dividend. In both cases, I indicated a preference for the other firm over the subject of the present article on the chicken king, Tyson Foods, Inc. ( TSN ).

In this article, I will break down why I consider Tyson to be a worthwhile investment, despite some less favorable comparisons to WH Group and JBS.

A Brief Recap - Tyson's Business

Tyson is famous for its leadership in the chicken/poultry industry in the US and is also one of the largest producers of poultry worldwide . On top of its catering to the growing chicken market with its well-known brands of Buffalo wings, chicken nuggets, chicken tenders, and other products, Tyson is also one of the world's largest producers of meat, chiefly due to its acquisition of IBP, Inc. in the early 2000s. In other words, Tyson is a leader in the meat industry by far, with major production and sales in the US and worldwide.

Even if I compared Tyson less favorably to other meat kings, Tyson still has the same advantage as the other meat kings of being a major global producer of the three most consumed meats on earth . This gives Tyson similarly powerful insulation from negative market forces and macroeconomic events as the other meat kings enjoy, and similarly sets Tyson up for many years of future success.

Risks and Dislikes About Tyson Compared To Its Peers

While I wouldn't say I have been outright bearish on Tyson, I did find some good reasons for negative comparison between the company and its meat king peers JBS and WH Group while analyzing the three firms.

Tyson's financials are comparable to WH Group's in most respects, but Tyson pulls in a significantly greater amount of revenue, indicating that its business achieves lower margins and less profit. This is generally unattractive when comparing companies, since higher margins and profit offer more security to weather the bad financial times that a firm may have in the future. Tyson also offers a currently and historically lower-yielding dividend than WH Group, despite both dividends being fairly safe with a payout ratio of less than 30%. As an investor who craves higher growth in the long term, be it from stock price appreciation or from dividend reinvestment, Tyson is less appealing to me when looking at these metrics and statistics.

Meanwhile, Tyson's diversification into the major meat classes, while admirable, manages to fall short of that of JBS's business ; JBS not only produces all three major meats consumed, like Tyson, but also has a leading position in lamb meat that Tyson does not match. Furthermore, Tyson's disadvantage in size compared to JBS translates to a reduction in the possible economies of scale of its production, thereby making Tyson's business more expensive to run by comparison. To top things off, the stocks of both JBS and WH Group are more undervalued than Tyson's stock, reducing Tyson's appeal to value investors.

However, despite these issues regarding the company, Tyson is still a big winner in its industry compared to most other companies in it, and has some valuable advantages over JBS and WH Group that I will expound on below.

Tyson's Financials - Slow and Steady

To recap Tyson's financials, per the JBS article:

Tyson['s] revenues stay[ed] in the ~$30-40 billion dollar range [from 2013] until 2018, after which point the company reliably stayed above $40 billion and climbed steadily to over $53 billion in 2022. Tyson's gross profit sharply jumped from the $2 billion range in 2013 and 2014 to the $4-5 billion range in 2015, where it hovered until 2020, after which it jumped to the $6 billion dollar range. Tyson's net income and operational cash flow both steadily increased from 2013 to 2022, with net income rising from $780 million to $3.2 billion in that 10 year timespan, and operational cash flow taking a bumpy ride from $1.3 billion to $3.8 billion from 2013 to 2021, before taking a noticeable dive in 2022 with op. cash flow of about $2.6 billion.

To me, these numbers demonstrate that the company is able to consistently perform in bringing in funds and keeping up sales and production in ordinary times. It shows that Tyson can also take advantage of more favorable market conditions and or macro conditions, i.e. a pandemic-induced meat shortage, to increase funds while maintaining adequate sales and production. Compared to JBS's lumpy financials even during normal times, Tyson has quite a bit going for it in terms of financial management, and the predictability of its financials will likely be attractive to value investors with low-risk tolerances.

Additionally, the ability of Tyson to consistently pull in tens of billions of dollars of revenue in any given year should not be dismissed. Many meat firms have revenues at most 1/10th of Tyson's, so Tyson is truly the cream of the crop in its industry. Even if its margins are lower than some of its peers, the maintenance of its financial position is an indicator of competence and prudence by Tyson's management regarding business operations, which is sure to appeal to investors of all kinds.

Lastly, the slow and steady increase in net income and op. cash flow, even before the pandemic, suggests that the less impressive margins of Tyson may soon become more appealing in the future. This may be something to watch over the next few years, as these increases could catalyze improvements in Tyson's overall financials, further increasing Tyson's investment appeal.

Tyson's Dividend - Safe and Sustainable

Tyson's annual dividend is currently sitting at $1.86, having steadily risen from $1.55 in 2019 after a big spike from $1.28 in 2018. That spike aside, Tyson's dividend displays a respectable regularity in its increases that dividend investors will like. It is also a safe dividend as I stated earlier in this article, with a payout ratio of about 28% at the time of writing. This compares to WH Group's similar 28% payout ratio and JBS's 200% payout ratio. Even with a similar payout ratio, though, WH Group's absolute dividend has been all over the map, ranging from "an annual dividend of $0.69, to $0.51, to $0.81, to $0.45, to $0.48 for each consecutive year of the 2018-2022 period," as I highlighted in the WH Group article.

Predictable, reliable, safe, and sustainable the distributions of Tyson are. They are not flashy, but they are secure, and many dividend investors, especially retirees, would be glad to have them as part of their holdings.

Tyson's Valuation - A Premium-Cut Meat King Trading at a Discount

As stated in the WH Group article, "TSN… sport[s] a GAAP P/E of 9, P/S of 0.4, P/B of ~1.1, and P/Cash flow of ~9." And as stated in the JBS article, "JBSAY is more undervalued than WHGLY/WHGRF, which is more undervalued than TSN." Yet the fact that TSN's valuation is the greatest of the three does not mean it is overvalued.

For reference, the consumer staples sector averages are as follows: P/E GAAP ratio of 23, P/S ratio of 1.2, P/B of ~2.5, and P/Cash flow of 16. TSN is thus trading at a discount of 60% based on earnings, 65% based on revenue/sales, 57% based on book value, and 33% based on cash flows compared to its sector.

TSN's valuation may be the highest out of all three meat kings, but compared to the whole consumer staples sector, it is still significantly undervalued by any metric, and it is still a value stock without question. Sometimes, reliability is worth a small premium.

Tyson's Advantages Over the Other Meat Kings

Aside from the general positives already listed for Tyson, there are certain advantages Tyson has over the other meat kings specifically that bear mentioning.

With the autocratic People's Republic of China's recent takeover of Hong Kong , where WH Group's headquarters is located, WH Group is now headquartered in an autocratic state. As I highlighted in my WH Group article, there are several risks of investing in a firm in an autocratic state - risks that do not apply to Tyson, which is headquartered in the United States, a politically liberal democracy.

While JBS's Brazilian headquarters does not present autocracy risks, JBS suffers from a different set of risks. Its dividend, while yielding very high at ~10%, has been inconsistent in absolute terms, and is clearly unsustainable, per its massive 200% payout ratio. JBS also has a very large debt burden of nearly $20 billion hanging over it; while not necessarily existential for the company, this is quite problematic considering it is larger than JBS's market cap and cash (~$7.5 billion and $2.5 billion) combined. Tyson's debt of ~$8 billion is much easier to stomach, especially with a market cap almost three times larger ($21 billion) that is supported by solid financials.

With reduced financial and geopolitical risks, Tyson is as investable a meat king as either of the other firms, even if I don't prefer it as an investment for myself. Other investors should therefore give Tyson a closer look when deciding what dominant meat stocks to add to their portfolio.

Conclusion

In two previous articles, I compared Tyson Foods, Inc. to other large meat-producing peers. I prefer one firm, WH Group Limited, because it is more likely to deliver a larger income stream to investors due to its higher dividend yield and better business margins. I prefer the other, JBS S.A., because it is more dominant in the meat market due to its sheer size and unmatched production rate, better insulating it from market downturns on account of the unyielding popularity of meat products. I also favor both firms because they are more undervalued than Tyson.

However, Tyson doesn't have risk factors associated with these other companies and is probably the lowest risk of all three meat kings. It specifically lacks the risks WH Group has of doing business in an autocratic state and also lacks JBS's risks of dealing with a massive debt load and unsustainable dividend. Additionally, Tyson's comparable size and production rate, combined with its consistency and reliability, are major advantages that should not be dismissed - in fact, these traits make me think that Tyson actually has a good chance of being the longest-lived meat company out of the three.

Consequently, for long-term value investors searching for an undervalued, reliable, dominant meat producer that they can buy and forget for many years to come, I rate TSN a buy.

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