Summary
- Shares continue to decline on the back of deteriorating profitability. At the same time there will be a good opportunity to buy the company at the bottom levels.
- Looking at the multiples, it looks cheap as always, about 30% below the industry average levels.
- Despite the weak report, Tyson Foods stock continues to gain market share, which gives a positive outlook for the future.
Investment point
Tyson Foods, Inc. (TSN) is an American multinational corporation operating in the food industry. Together with its subsidiaries, Tyson Foods owns the Jimmy Dean, Hillshire Farm, Sara Lee, Ball Park, Wright Brand, Aidells and State Fair brands. Key revenue segments are beef, pork, chicken and prepared foods. On Feb. 6, the company released its quarterly report , which disappointed investors with a further decline in profitability. Compared to the previous year's record numbers, earnings for the most recent quarter were down due to weak results in the chicken, pork and beef segments. The company also revised and lowered projected margins in major categories. Consequently, earnings may remain under pressure this year. Nevertheless, there were some positives from the report, such as the prepared foods segment, where operating profit was up by 43% Q/Q. From our point of view, we do not expect things to improve next quarter, as next quarter is seasonally weaker. Nevertheless, we believe that all the negatives are already priced in.
Quarterly results and forecasts
As a result of iconic retail brands Tyson, Jimmy Dean, Hillshire Farm and BallPark, Tyson's core business lines outpaced the overall food and beverage market and its competitors by 9% YoY growth, according to Nielsen . From the earnings call we know that consumers spend money on categories and brands they know and trust. Tyson improved on-shelf occupancy and availability. The price gap has narrowed compared to competitors, while continuing to invest in merchandising and advertising to support brands. These factors, along with other strong business fundamentals, have led to consistent quarterly growth in Tyson's core business share, driving a 5-year high market share of 28 %. And despite the poor profitability results, and the highly competitive nature of the business, we could say that the company has been and will continue to be a leader in its business. For example, Tyson Foods was ranked number one on Fortune magazine's list of the world's most respected companies in the food manufacturing category for the seventh consecutive year. In addition, the company continues to work on automating its production. As an example they recently launched an automated sandwich packaging and burrito assembly line, as well as an automated snack production line. Management is confident that the company will be able to increase volume, revenue and operating profit in the second half of 2023. We believe things will start to improve after 2024.
Digging deeper into the numbers, overall revenue increased by 2.5% y/y, but net income was down by 71% due to lower profitability in all segments except prepared foods. Semi-finished products increased significantly, but poor results for chicken, pork and beef led to a $988m drop in total operating profit to $467m on y/y basis. Operating cash flow decreased by 46% y/y. Inventories, on the other hand, increased, reaching an all-time high for the company of $5.59bn.
Operation Income (Resource: Investors relations)
Overall, the reasons why the company performed so poorly include high retail prices, a strong dollar - this applies to international markets. Also in the chicken segment, price results, although improved, were lower than expected. They attribute this to a combination of factors, mainly the presence of competition from beef. Nevertheless, the company has a productivity improvement program that is expected to provide up to $400 m extra this year.
Sales, AIO and EPS performance (Resource: Investors relations)
Valuation
If we look on multiples values, the company is cheap, roughly trading by 25-30% below the industry average levels. 3-year revenue GAGR is 8%, and for 2023 we expect 3-7% YoY growth. Dividend yield is 3.18%, with a small payout ratio of 27% of the profit, but significant of FCF, which has declined in recent quarters. Historically, the company's FCF has not been strong because of low profitability, but now one thing could overlap with another - low profitability on one side and rising capital expenditures on the other, which might not make FCF negative, but would severely limit its size.
Bottom line
In our opinion, the company will experience temporary difficulties this year. Improvement of the situation can be expected after 2024. The company is aware of its problems and that is why it makes personnel reshuffle and attracts new top managers. As it was already said that the most part of negativity is embedded in the price, and the growth will continue with the recovery of indicators. We also note the growth of the company's market share, which should support positive expectations for the future. In addition, Tyson foods remains a defensive company during the recession. If prices fall below $60, there will be an attractive opportunity to buy the company into a defensive portfolio. Overall, the recommendation for this year is HOLD.
For further details see:
Tyson Foods: Profitability Continues To Deteriorate