Tyson Foods Inc. (NYSE: TSN). We expect Tyson’s FY21 results to be hurt by COVID-19, as the company is facing additional costs to shut down and then reopen plants and protect employee health. In addition, foodservice sales (about 40% of revenue) have been hurt by the closure of restaurants and school cafeterias. On the positive side, retail sales at supermarkets and convenience stores have benefited from increased consumer demand.
Despite current challenges, we expect Tyson to overcome the near-term impact of the pandemic and are maintaining our long-term BUY rating.
On November 16, Tyson reported fiscal 4Q20 adjusted EPS of $1.95, up from $1.21.
In FY20, revenue rose to $43.2 billion from $42.4 billion in FY19. Adjusted operating earnings rose to $5.78 per share from $5.68.
Keystone will increase Tyson’s presence in the foodservice market and in the Asia-Pacific region.
In June 2017, Tyson paid $40.25 per share to acquire all of the outstanding shares of AdvancePierre Foods Holdings Inc. (APFH), a producer of ready-to-eat lunch and dinner sandwiches and snacks. We think that AdvancePierre’s products will enable Tyson to broaden its prepared food offerings for both in-home and away-from-home dining. Tyson management expects the acquisition to generate cost synergies of about $200 million within three years.
EARNINGS & GROWTH ANALYSIS
The company organizes its business into five divisions: Chicken, Beef, Pork, Prepared Foods, and ‘Other.’ We discuss fiscal 4Q20 business trends in these divisions below.
Chicken sales fell $14 million in the fiscal fourth quarter, to $3.43 billion, reflecting lower output associated with COVID-19 and lower foodservice demand.
Beef sales increased approximately 11% to $4.3 billion, reflecting a 12% increase in volume.
Pork sales rose approximately 9% to $1.4 billion, driven by strong demand. Segment operating profit rose to $162 million from $27 million, and the operating margin rose to approximately 13%.
In the Prepared Foods segment, revenue rose 575 basis points, to $2.28 billion, driven by growth in the consumer products channel. Operating profit rose to $236 million from $149 million and the segment operating margin rose to 11% from 7%.
The ‘Other’ segment includes the International business, which Tyson moved to this segment in 4Q15. Adjusted 3Q20 revenue fell to $491 million from $513 million a year earlier.
We expect growth to accelerate to 16% over the next five years, despite results that may be uneven from quarter to quarter.
Reflecting the company’s better-than-expected fiscal third and fourth earnings, we are raising our FY21 estimate of $6.10 from $6.00 and setting an estimate of $6.50 per share for FY22.
FINANCIAL STRENGTH & DIVIDEND
The company scores well on three criteria: long-term debt/capital, interest coverage, and return on equity.
We think an interest coverage ratio above five indicates healthy leverage. The company’s return on equity has averaged more than 14% over the past four quarters, well above the industry average of 11.5%.
MANAGEMENT & RISKS
On August 3, Tyson announced that President Dean Banks would succeed Noel White as CEO on October 3, 2020. Mr. White will remain as executive chairman.
Tyson’s inputs consist of live cattle, live hogs and corn and soy (feed). These inputs are affected by disease and drought and could increase the company’s input costs, irrespective of demand. TSN’s profitability reflects high plant utilization, and weak demand could undermine management’s efforts to improve margins. Consumer preferences for healthier food are a risk for Tyson.
Management could also fail to generate the expected synergies from acquisitions. More than 12% of the company’s revenue is international, and unfavorable exchange rates could lower reported sales.
Based in Springdale, Arkansas, Tyson’s customers include fast food restaurants, food distributors, grocery stores, military commissaries and wholesale clubs.
TSN shares appear fairly valued at current prices above $65, below the midpoint of their 52-week range of $50-$90. They are trading at 10.7-times our revised FY21 EPS estimate, below the average multiple of 17.1 for large-cap food processors and below the midpoint of their three-year historical range of 9-19. We believe this multiple adequately reflects prospects for weakness in FY21, followed by recovery in FY22.
On December 1 at midday, HOLD-rated TSN traded at $66.65, up $1.46.