Tyson Foods (TSN, Financial) is one of the largest food companies in the U.S. and also the largest beef and chicken producer in the country. Despite its size, the company has limited economies of scale and brand strength. It is currently dealing with inflationary pressures, rising labor costs and supply chain constraints due to high demand and limited supply.
One of the key takeaways from its recent earnings announcement was the management's expectation of the total company volumes increasing by 2% to 3% this year. Increasing volumes in meat consumption, especially in an environment where plant-based meat substitutes are gaining more and more momentum, can be considered a good sign. Let us take a closer look at the company’s operations and evaluate its potential in the face of multiple headwinds.
International growth
Tyson Foods is predominantly focused on the U.S. markets and is the largest beef and chicken producer in the country, but it has potential for international growth. Their beef segment has been a bright spot in its portfolio in recent years. Strong international demand, combined with a drought-induced beef shortage in Australia, has boosted the beef segment's operating margins.
On the other hand, the chicken segment has suffered from execution errors that have resulted in structurally higher costs. Its long-term growth prospects are influenced by a number of secular trends. While Americans are reducing their consumption of red and processed meat, they are increasing their chicken consumption.
International meat demand has been strong, and while Tyson's overseas sales mix is around 12%, it is expected to grow over time as the company focuses on acquisitions. This could be a key area of growth for the company. Better branding of its meat should also help.
Pricing strategy and branding issues
While Tyson may be among the largest food companies in the world, it has not built brands that are powerful enough to command huge premiums. This is why its ability to charge premium pricing is limited. Like most other meat producers, it uses the same approach of cost-based pricing, looking to pass on the meat production cost rise to consumers.
The pandemic and massive money-printing led to a solid price rise in almost all types of meat, whether it is beef, pork, or prepared foods. The company has successfully been able to pass on the price rises to consumers so far with the justification of supply shortages during the pandemic. This trend has carried on in 2021 as well, and Tyson's increased prices compensated for the lower volumes in various categories.
The volume consumption has been improving with the increased food service demand despite the headwinds in the supply chain and labor shortages. Inflationary pressures in terms of input costs have resulted in double-digit price increases in chicken, beef and pork. However, it remains to be seen if Tyson can repeat this in 2022. Another major concern for the management today is the increasing focus of consumers on plant-based meat substitutes, which are leading to a fall in volumes.
Plant-based protein offerings and other drivers
There are a number of positives that shareholders can look forward to for Tyson Foods in 2022. Its e-commerce revenues have consistently been growing in 2020 and 2021 with over $1 billion a year being generated from online sources. This should continue to be a strong driver in 2022 as well.
Also, Tyson Foods is adapting itself well to the plant-based and blended protein consumption trend through its Raised & Rooted brand, which offers both 100% plant-based protein products and blended products containing both meat and plant-based proteins. Through Tyson’s strong distribution network across stores and restaurants, this brand has witnessed a staggering 250% growth over the past year.
Final thoughts
Despite the management's operational optimization efforts and increased prices, it is difficult for Tyson Foods to see higher margins given the fact that inflation and labor issues are resulting in higher input costs. The management’s earlier plan of implementing $200 million in cost savings through better efficiency in operations and supply chain should continue throughout 2022 along with the reduction of the Covid-related incremental costs.
Tyson Foods stock has had a slow-moving upward trajectory over the past year and has been a good defensive investment. One of the biggest issues with the company is the fact that the majority of its products are undifferentiated, which is why commanding a price premium and achieving higher profits through premiumization is difficult. The best growth prospect for Tyson Foods is thus to expand more beyond the U.S. and carry out better marketing and branding.
The company is currently valued at an enterprise-value-to-revenue ratio of around 0.81, which appears fair. Given its current challenges, I believe that a wait-and-watch approach is best suited for Tyson Foods. Just keeping up with inflation alone isn't enough to drive meaningful growth.