Tyson Foods (TSN, Financial) cheered the Street with its fourth quarter results, and its latest addition, Hillshire Brands, played a significant role to boost its growth during the quarter. Adjusting for non-recurring costs and costs related to mergers and acquisitions, the company reported year over year growth in both revenue and profits that came above Street expectations. The company has many tailwinds, which could drive its growth in the days ahead.
Moves to watch
Tyson, the biggest U.S. chicken processor, is operating at a time when demand for chicken is on the rise. The continuous decline in U.S. cattle has squeezed the supply of beef, which has made it expensive. Consequently, consumers are shifting to chicken, which is Tyson’s highest margin segment and also the biggest source of profit. Moreover, the company anticipates that the chicken segment's profit margins would rise more than 10% in 2015 from its previous range of 7% to 9%.
During the year, Tyson made the biggest deal in the meat industry with the acquisition of Hillshire brands. It sells a variety of meat products such as hot dogs, corn dogs, breakfast sausages, dinner sausages, and deli meats along with other frozen and baked products. This acquisition is expected to be a strong margin driver for Tyson as Hillshire’s brands such as Jimmy Dean and Ball Park provides the company with higher pricing power. With this integration, Tyson will incorporate higher margin products in its portfolio and eventually reduce its operational risk. The deal was completed for a sum of $7.7 billion and is expected to save around $300 million annually in the coming months.
Smart measures
In fact, over the course of time, Tyson has learned various measures to become a high revenue and low cost player among its peers. Its strong management knows well how to tackle commodity volatility, which is more important than just running a commodity business. For instance, in the current scenario where beef has become expensive and consumers prefer chicken, the company is producing more case-ready beef for driving incremental sales, margins, and consumer occasions.
In addition, the company also made changes to the line of Jimmy Dean frozen sandwiches and bowls, and launched it for lunch and dinner, taking it beyond breakfast. Tyson will adopt a strong marketing strategy for this launch, including television, digital, and shopper marketing support.
Talking from a global perspective, the company is facing some headwinds on account of falling chicken demand in China. This was flared by an alleged out of date poultry from a U.S supplier, coupled with the outbreak of avian influenza in the region. But, management is confident that this is only a minor setback and once demand sets in, it will resume its expansion in China.
On the other hand, it will sell some of its businesses in Latin America and the proceeds will be used to bring down the debt. Although this is a tough decision, but it's also a wise thing to do and will generate better long term return on invested capital. These efforts will help the company cut its operational losses to $50 million for the International segment.
Talking about its future strategies, Tyson Foods President & CEO Donnie Smith said,
“The understanding of the consumer-centric demand and overall supply fundamentals allows us to make decisions that are ROIC-based and provide the least volatility and best prospects for long-term growth.”
Conclusion
These are encouraging facts, which reflect that the company is on track to deliver year over year growth in the days ahead. The stock has more than doubled in the past two years, and considering its future prospects, we could see more upside.
