In this article, let's take a look at Tyson Foods, Inc. (TSN, Financial), a $17.6 billion market cap company, which is one of the world's largest suppliers of beef, chicken, pork and prepared foods. The firm operates in the food industry, which is highly competitive and is dominated by HJ Heinz (HJH, Financial), Kraft Foods (KRFT, Financial), General Mills (GIS, Financial), and Kellogg (K, Financial).
Fund´s positions
Steven Cohen (Trades, Portfolio)´s Point72 Asset Management disclosed a reduction by 16.3% in its exposure to the company´s stock. The fund owns 4.33 million shares of the company, which accounts for roughly 1.1% of its total portfolio, the value of the stake amounted to $165.8 million.
The second-largest shareholder is Israel Englander´s Millennium Management. The fund disclosed holding 3.93 million shares, up by 10% on the quarter, with the value of the stake amounting to $150.52 million. Another fund that owned shares of Tyson Foods was Ken Griffin‘s Citadel Investment, holding 2.99 million shares, down by 47% on the quarter. The value of the stake amounted to $114.48 million as of the end of the first quarter.
Industry risk
Tyson may be affected by the cyclicality of the markets. The company´s exposure to agricultural commodities is high and results could be volatile. In addition, due to weather conditions, feed costs have been volatile some years ago, affecting margins. Tyson´s operating margin is shown in the next table.
| Quarter Ended | Dec12 | Mar-13 | Jun-13 | Sep-13 | Dec13 | Mar-14 | Jun-14 | Sep-14 | Dec14 | Mar-15 |
| Operating Margin (%) | 3.63 | 2.82 | 4.80 | 4.68 | 4.70 | 4.00 | 3.63 | 3.03 | 4.71 | 5.48 |
Further, it has one of the lowest margins in the industry. Operating Margin is ranked lower than 54% of the 1,169 companies in the Global Farm Products industry.
Complementary asset
Tyson has a huge amount of debt in order to finance the premium it paid for Hillshire Brands. The company acquired Hillshire Brands because its business fits well with the company's plans to expand the prepared foods business. I think it was a strategic acquisition because with the deal Tyson is searching for cost savings. The firm plans to achieve over $500 million in cost synergies, which sounds a bit exaggerated, but according to analyst Dave Novosel, Tyson has already achieved $70 million in annual synergies from the deal.
On the other hand, a story that began in 2014 is ending. In the past days, Brazilian JBS SA said in a market filing that Mexico's market regulator approved its subsidiary JBS Food's bid to acquire Tyson Foods in Mexico.
Revenues and profitability
Looking at profitability, revenue grew by 10% to $9,979 million from $9,032 million and explains some part of earnings per share's increase of 25% in the most recent quarter compared to the same quarter a year ago ($0.75 vs $0.6). Tyson Foods has a positive trend in earnings per share growth over the past years. This is very important because the competition makes margins to be low and achieving earning profit becomes a challenge. During the past fiscal year, the company increased its bottom line. It earned $2.40 versus $2.32 in the previous year. This year, Wall Street expects an improvement in earnings ($3.43 versus $2.40).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| TSN | Tyson | 12.54 |
| MJN | Mead Johnson Nutrition Co | 143.18 |
| K | Kellogg Co | 14.17 |
| CAG | ConAgra Foods Inc | -14.79 |
| HRL | Hormel Foods Corp | 18.11 |
| CPB | Campbell Soup Co | 47.75 |
| Â | Industry Median | 7.11 |
The company has a current ROE of 12.5% which is higher than the one exhibit by Conagra Foods Inc. (CAG, Financial) and similar to the one exhibited by Kellogg (K, Financial) .In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Hormel Foods (HRL, Financial) and Campbell Soup (CPB, Financial) could be appropriate options. Mead Johnson Nutrition (MJN, Financial) exhibited a tremendous ratio.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
| Quarter Ended | Dec12 | Mar-13 | Jun-13 | Sep-13 | Dec13 | Mar-14 | Jun-14 | Sep-14 | Dec14 | Mar-15 |
| ROE (%) | 11.49 | 6.28 | 16.21 | 16.82 | 16.27 | 13.40 | 15.84 | 7.03 | 13.72 | 13.42 |
Relative valuation
In terms of valuation, the stock sells at a trailing P/E of 16.88x, trading at a discount compared to an average of 22.2x for the industry. To use another metric, its price-to-book ratio of 1.88x indicates a premium versus the industry average of 1.76x while the price-to-sales ratio of 0.42x is below the industry median of 1.01x.
The stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $23.583, which represents a 19.7% compound annual growth rate (CAGR).
Final comment
As outlined in the article, the company has significant exposure to risk markets. In a future scenario with higher costs, margins will be negatively impacted, so earning efficiencies become relevant. In my opinion, accelerating growth through acquisitions has been a fundamental piece for expansion, and it will be a long-term driver if and only if it can manage to repay the debt with the cost savings achieved with the Hillshire deal.
The PE relative valuation and the return on equity that exceeds the industry median make me feel bullish on this stock.
Hedge fund gurus like Ray Dalio (Trades, Portfolio), Chris Davis (Trades, Portfolio), Scott Black (Trades, Portfolio) and John Buckingham (Trades, Portfolio) have added this stock to their portfolios in the first quarter of 2015, as well as Pioneer Investments (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio) and Caxton Associates (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
