2023-03-29 17:19:33 ET
Summary
- I believe Tyson Foods has destroyed shareholder value in the last five years, with a TSR of less than -12%.
- The company’s financial results have been fairly ordinary, if not disappointing.
- On a historical basis, there does not seem to be any justification for a belief that the company is a great investment in the making.
Tyson Foods, Inc. ( TSN ) has had a torrid five years, destroying shareholder value throughout that period in my view. For many value investors, that is often the signal to jump in. An analysis of the company's results shows that the market has actually done a good job at pricing the company, given how unexceptional its results are from a wider, historic perspective.
Uninspiring Stock Market Performance
In the last five years, Tyson Foods' total shareholder return ((TSR)) has declined by nearly 13%, compared to a gain of more than 46% for the S&P 500 (SPX), and an equal-weighted average TSR of over 58% for the company's peer group. Tyson Foods' peer group consists of: Archer-Daniels-Midland Company (ADM), Bunge Limited (BG), Campbell Soup Company (CPB), ConAgra Foods, Inc. (CAG), General Mills, Inc. (GIS), Hormel Foods Corp. (HRL), Kellogg Co. (K), Kraft Heinz Company (KHC), Mondelez International, Inc. (MDLZ), PepsiCo, Inc. (PEP), Pilgrim's Pride Corporation (PPC), The Coca-Cola Company (KO), The Hershey Company (HSY), and The J. M. Smucker Company (SJM).
Unexceptional Growth
The pandemic was a turning point for Tyson Foods. Between 2018 and 2020, the company's revenue grew from $40.05 billion to $43.19 billion, at a 3-year compound annual growth rate ((CAGR)) of just 2.55%. Crédit Suisse's The Base Rate Book provides a useful source of base rates for the 1950 to 2015 period. In that era, 25.2% of firms compounded revenue at 0% to 5%, with the era having a mean 3-year sales CAGR of 8.1% and a median 3-year sales CAGR of 5.4%. However, the pandemic, and its impact on demand, fueled inflation and with it, a surge in revenue. Post-pandemic, revenue has grown from $43.19 billion in 2020 to $53.28 billion in 2022. Overall, the 5-year sales CAGR is 5.87%, against a reference period mean 5-year sales CAGR of 6.9%, and a median of 5.2%. In short, Tyson's growth is merely within the realm of the normal. In Q1 2023, revenue was $13.3 billion, up 2.5% from the $12.9 billion in revenue the company earned for the same period in the year prior.
A Profitable, But Normal Enterprise
Gross profits rose from $5.13 billion in 2018 to $6.67 billion in 2022, at a 5-year CAGR of 5.4%. Gross profitability, which scales gross profits by total assets, rose from 0.176 in 2018 to 0.18, well short of the 0.33 threshold that Robert Novy-Marx's research has found marks out of a stock as attractive. Operating income rose from $3.06 billion in 2018 to $4.4 billion, at a 5-year CAGR of 7.53%. Tyson Foods' operating margin, meanwhile, rose from 7.63% in 2018 to 8.28% in 2022. Once again, when compared to the reference period, the company's results look decidedly ordinary. The mean operating margin for our reference period was 8.3%, and the median was 8%. Considering that operating margins have been on an historic rise over the last few decades, Tyson Foods' margins are even more unimpressive.
Earnings rose from $3.03 billion in 2018 to $3.25 billion in 2022, at a 5-year earnings CAGR of 1.43%. In our reference period, 34.1% of firms achieved a 5-year earnings CAGR of 0% and 10%, and the mean 5-year earnings CAGR for the period was 7.3% and the median was 5.9%. This further cements the feeling that Tyson Foods has suffered so much on the stock market because the underlying business has gone sideways.
Tyson Foods' free cash flow ((FCF)) declined from $1.76 billion in 2018 to $800 million in 2022, at a 5-year FCF CAGR of -14.62%. Admittedly, much of this is distorted by 2022's results, and the company looks better if you could magically take out 2022. In that 5-year period, the company earned $9.12 billion in FCF, or 44.34% of its market capitalization. The company's return on invested capital ((ROIC)) rose from 16.8% in 2018 to 21% in 2022. In the current period, ROIC has declined to 16%. ROIC remains, however, top tier.
Alignment Between Shareholder and Management Interests
In the company's favor is that its executive compensation policy works to align shareholder and management interests. This is an often underestimated part of a business's policies, at times underestimated even by those who understand its importance. According to Tyson Foods' 2022 Proxy Statement , the company's performance stock grants are subject to performance measures. Management must achieve a 3-year cumulative Adjusted Operating Income ((AOI)) target measured from the start of the fiscal year 2022, an attractive TSR relative to the TSR of its compensation peer group over the same 3-year period and a target return on invested capital ((ROIC)) metric over that period. The important metric in terms of aligning interests is ROIC, which constitutes 25% of those performance measures. Management correctly selected ROIC in the belief that "this metric is a robust indicator of Company performance that is aligned with shareholders' interests, takes into account operating performance and balance sheet health and is complementary to, and not duplicative of, the cumulative Adjusted Operating Income criterion."
This is a positive, but, we would want the company to make ROIC the sole metric used to compensate management, as this would clarify what they should be focusing on, which is long-term value creation. Chasing multiple targets confuses things and can be contradictory: what improves AOI may reduce ROIC, for instance, and ROIC is key to growing corporate value in the long run.
Valuation
Tyson Foods has a price-earnings (P/E) multiple of 8.6, compared to a peer group PE of 21.87. While this seems to suggest that the firm is undervalued, assessing it from an operating perspective, and taking into consideration the mediocrity to the normalcy of its results, the present relative valuation seems justified. With -$180.1 million in FCF in the trailing twelve months ((TTM)), the firm has an FCF yield of -0.25% compared to a peer group average of 0.74%. In addition, its gross profitability, at 0.18, trails that of its peer group, which is 0.22. We have already seen that its TSR over the last five years was -12.59% compared to 58.26% for its peer group. Finally, we can say that in the firm's favor, the shareholder yield, at 5.17%, is higher than that of its peer group. Ultimately, the firm does not present an attractive investment.
Company | Ticker | TSR | Gross Profitability | FCF Yield | PE | Shareholder Yield |
Tyson Foods, Inc. | TSN | -12.59% | 0.18 | -0.25% | 8.60 | 5.17% |
Archer-Daniels-Midland Company | ADM | 117.05% | 0.13 | 5.03% | 10.19 | 2.63% |
Bunge Limited | BG | 49.59% | 0.15 | -42.15% | 9.19 | -4.12% |
Campbell Soup Company | CPB | 49.38% | 0.22 | 5.36% | 20.20 | 3.36% |
ConAgra Foods, Inc. | CAG | 20.48% | 0.13 | 4.67% | 26.44 | 0.09% |
General Mills, Inc. | GIS | 100.02% | 0.21 | 5.12% | 18.31 | 4.77% |
Hormel Foods Corp. | HRL | 33.80% | 0.16 | 3.24% | 21.88 | 2.31% |
Kellogg Co. | K | 20.56% | 0.25 | 5.12% | 23.76 | 3.50% |
Kraft Heinz Company | KHC | -26.58% | 0.09 | 3.30% | 20.10 | 4.20% |
Mondelez International, Inc. | MDLZ | 77.14% | 0.16 | 3.16% | 35.51 | 4.22% |
PepsiCo, Inc. | PEP | 90.44% | 0.50 | 2.37% | 27.95 | 2.71% |
Pilgrim's Pride Corporation | PPC | -12.26% | 0.20 | 4.17% | 7.13 | 1.53% |
The Coca-Cola Company | KO | 67.92% | 0.27 | 3.62% | 28.05 | 2.67% |
The Hershey Company | HSY | 186.49% | 0.41 | 3.50% | 33.95 | 2.03% |
The J. M. Smucker Company | SJM | 41.62% | 0.17 | 3.83% | 23.56 | 4.18% |
Peer Group Average | 58.26% | 0.22 | 0.74% | 21.87 | 2.43% |
Source: Company Filings and Author Calculations
Conclusion
Tyson Foods has a fairly solid business that does not really stand out amongst its peers. While the company has certainly grown, and shown positive results, it does not present an attractive investment opportunity. The present valuation seems supportable based on the company's performance.
For further details see:
Tyson Foods Likely Won't Satisfy Your Appetite For Returns