One of the industries hardest hit by the inflationary environment has been food production. Most food producers are suffering higher input costs such as livestock, grain and feed as well as labor and supply chain issues. However, it’s hard to pass on those costs through price increases as it may affect consumer demand. Usually, investors like to think of food as a recession-proof industry, but for some reason, that's turning out not to be the case this time around, at least in the U.S.
Tyson Foods Inc. (TSN, Financial), one of the largest producers of beef, chicken and pork products in the U.S., recently suffered a surprising quarterly loss because of these issues. Tyson is an industry leader in key food proteins. Founded in 1935, the company has a broad portfolio of products and brands which includeTyson, Jimmy Dean, Hillshire Farm, Ball Park, Wright, Aidells and State Fair. Headquartered in Springdale, Arkansas, the company employs over 142,000 people. Tyson expects to generate over $53 billion in revenues this fiscal year and currently has a market capitalization of $18.6 billion.
Protein market
According to Food Business News, U.S. consumers can anticipate greater availability of pork, chicken and turkey, but less beef, going forward. Cattle inventory has declined largely due to the closure of meat processing plants due to Covid-19 related disruptions. Drought conditions also caused a decrease in the total herd size because farmers were selling cows earlier than normal. Abnormal drought continues to affect several leading cattle states such as Kansas, Oklahoma and Nebraska.
Consumer demand in the U.S. for beef, pork and chicken was strong before the onset of the pandemic but became even stronger as consumers stayed home and cooked more. Beef was the biggest winner, as consumers cooked meat more frequently as a substitute for restaurant visits. One would think that would contribute to support for higher prices, but alas for Tyson investors, things aren't that simple.
Recent earnings
For its second quarter of fiscal 2023, which ended on April 1, Tyson reported disappointing results which were below expectations. Sales were $13.1 billion, which were roughly flat compared to the prior year period. The beef segment is having a difficult year with sales declining 8.2% in the quarter. In the pork segment, revenues declined 9.2% due to weaker pork prices, largely due to a glut of pigs in the market.
Operating income was crushed and turned to a loss of $49 million, or a gain of $65 million on an adjusted basis which excludes extraordinary items. The company indicated that that substantial majority of the decline in operating income was driven by lower earnings in the beef and chicken segments. Higher input costs such as grain and feed as well as higher labor costs are hurting margins for the company.
The company’s balance sheet remains reasonably safe with cash of $543 million and long-term debt of $7.9 billion. Working capital was positive at $3.5 billion. The leverage ratio is slightly elevated at 3.2 due to depressed levels of Ebitda this year, but should drop significantly in 2024 as margins return to normal.
Valuation
Due to difficult operating conditions, Tyson expects its earnings will be depressed in the fiscal year ending September 2023. Analysts' earnings per share estimates for the fiscal year of 2023 are $1.67, which is a significant decline from the $8.92 reported in fiscal year 2022.
As margins start their climb back to normal in the 2024 fiscal year, analysts' EPS estimates increase to $3.54, which provides a more reasonable forward price-earnings ratio of approximately 14.
The GuruFocus DCF calculator provides a fair value close to the stock price as of this writing (which is $51.33) when I plug in analysts' average 2024 EPS estimate, as well as a discount rate of 10% and a 10-year growth rate of 7.6%. However, that is my worst-case scenario. The past two years have seen EPS in the $8.00-$9.00 range and the two years prior to that saw EPS in the $5.00-$6.00 range.
The company currently pays an annualized dividend of $1.92, which equates to a 3.69% dividend yield. The payout ratio is over 100% currently, but should fall well below that level in coming years as the company recovers.
The average price target for the eight analysts that cover the company on Wall Street is $53.75 with a high of $64.00 and a low of $48.00.
Guru trades
According to the latest round of 13F reports, gurus who have purchased Tyson stock recently include Tom Gayner (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio). Gurus who have reduced or sold out of their positions include Ken Fisher (Trades, Portfolio) and Ray Dalio (Trades, Portfolio).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Summary
Demand for key protein meats such as beef, pork and chicken by consumers still remains strong, even if pricing is struggling. Tyson has been experiencing difficulties as it finds itself unable to hike prices in line with the cost inflation it is experiencing.
However, with a history going back 88 years, Tyson has certainly seen its share of commodity cycles as well as economic cycles. It has typically come out stronger when the cycles eventually turn.
