Tyson Foods, Inc. $TSN
My Investment Checklist
1. Is the company undervalued?
EV/EBIT: 5.41
EV/Sales: 0.61
Price/Book: 1.27
$TSN has historically been a slow and steady grower. The company is also trading at a compressed valuation and returning meaningful capital back to shareholders. Conversely $TSN is challenged with a difficult macro environment and face tough upcoming comps. For example, earnings are expected to be lower a year from now. Notwithstanding this a predictable business, which investors can hold for years if not decades with limited downside risk.
2. Can I easily explain what the company does?
Yes, they’re in the food business. Tyson’s operating segments include; beef, chicken, prepared foods, and pork.
3. Does the cash flow statement line up with income statement?
Yes, cashflows have been higher than reported earnings:
Most of their excess cash went towards; debt reduction, capital expenditures, buybacks, dividends paid out, and a build up of inventories. Inventories up ~21% YOY is the only cause for concern, especially being a food distributor. Although inventories were historically low in 21’, which makes this number look worse than it really is. Other than that, I zero issues with the way management allocated their capital.
4. Is the Balance Sheet Healthy?
Total Cash: $1.06B
Total Debt: $8.33B
Current Ratio: 1.99
$TSN has a formidable balance sheet with historically low leverage ratios. Moreover the company is expecting net interest payments to come in around $350M this year, which EBIT covers nearly 17X over. All in all an extremely sound balance sheet.
5. How profitable is the business?
Gross Margins: 15.5%
Operating Margins: 11.3%
Net Margins: 7.7%
Being a food company, it shouldn’t surprise anyone to see a low margin profile. In fact, $TSN is overearning compared to its history:
Any sort of mean reversion here, would imply a precipitous drop off in earnings. This is likely why the stock is trading at such a low valuation. Furthermore the business did get a margin boost from tailwinds in beef, which is unlikely to last. For example, the beef segment posted a 10.7% operating profit margin last quarter. Management believes this business unit will normalize around a 5-7% operating margin long term. On the other hand their pork and prepared foods segments are likely underearning, so perhaps the drop off in profitability won’t be as drastic as the market is anticipating.
6. What is the company’s growth potential?
10-yr Revenue CAGR: 3.9%
10-yr Operating Profit CAGR: 13.08%
10-yr FCF CAGR: 18.13%
Bottom line growth here is almost certainly overstated. In 2012 (the start date used), Tyson posted a 3.3% operating margin compared to 9.3% in 2021. Nonetheless $TSN is a growing company, which should be able to maintain low single digit growth for an extremely long time. Although a good portion of this growth has been inorganic. Since 2012 $TSN spent ~$12.8B on net in acquisitions. All else equal I would prefer 100% organic growth, but it’s better than not growing at all.
7. Is management rewarding shareholders?
Tyson currently offers investors a 2.63% dividend and are authorized to buyback 12 million shares. Management has also paid out dividends and repurchased shares every year going back to 2015. Further, the company is expected to post north of $2B in free cash flow next year and have pretty much never had a better sheet. I would conservatively estimate shareholders get $1.5B on net back in the next 12 months, which works out to a little more than a 6% shareholder yield. That’s pretty solid, but not out of this world for a bear market.
8. How does the company stack up against their peers?
Congara $CAG is Tyson’s closest competitor:
$CAG EV/Sales: 2.19
EV/EBIT: 14.68
Operating Margin: 15%
$CAG is more expensive than $TSN, but they’re a more profitable business and margins aren’t expected to contract as much. Additionally both companies are shareholder friendly, but $CAG is a no growth company and has a worse balance sheet. For these reasons $TSN appears to be the more attractive risk adjusted bet.
9. What’s the counter argument?
The counter argument is that profits margins will erode as $TSN won’t be able to pass on inflationary input costs to their consumers.
I totally buy into this thesis, especially with management echoing the sentiment. As a quick mental exercise, if operating margins came down to their historical average of 6.7%. The company would be trading at 9.11X EV/EBIT (LTM). That’s still cheap but not crazy for a company growing at low single digits.
10. Is there something I think the market may be missing?
I actually don’t think the market is missing anything. Yes the company is probably a little cheap, but we’re in a bear market and that’s to be expected. I will say $TSN can add a lot of shareholder value by repurchasing shares here, but it doesn’t sound like that’s going to be the case:
“Stewart Glendinning (CFO)
And then, of course, your question really about why don't we go to the share buyback, I mean, last year, this time, we spent about $50 million on buybacks. This year, we've got almost $700 million. And part of that is catching up on the dilution that we had from last year. So we'll see how that goes, but we're very pleased with where we are from a balance sheet standpoint”
Final Thoughts:
My base case would be as follows topline growing at 4% per year, with a 6% net shareholder yield annually and a 0.8X EV/Sales exit multiple in 5 years’ time. That works out to a ~15.5% IRR, which is pretty good if you’re looking for a safe bet. However I’m glutton for punishment and see much higher expected returns elsewhere, albeit with more risk. Nevertheless I would definitely revisit the name if shares remained cheap while the broader market recovered.
***Disclosure: I have no position in the security mentioned above, nor do I have any plans to purchase within the next 72 hours. This article is intended for educational purposes only and in no way should be interpreted as investment advice