Tyson Foods Inc. (TSN, Financial) is the largest meat producer in the United States, where it also makes the majority of its profit.
The company is responsible for one out of every five pounds of meat consumed in the U.S. That’s $15 billion worth of beef, $11 billion of chicken and $5 billion of pork, with half of the products distributed by grocery stores and the other half going directly to McDonald’s (MCD, Financial), Burger King (QSR, Financial), Wendy’s (WEN, Financial), KFC and other food service outlets.
Tyson sells items under its own brand as well as the Wright, Jimmy Dean, Hillshire Farm and Ball Park labels. The company’s livestock-raising is concentrated in chicken (30% of sales), with third-party farms providing the cattle and hogs for Tyson to process. This added up to $2.8 billion in net income on $40.2 billion in revenue over the last 12 months.
The per-share numbers are up big over the last decade thanks to a greater level of efficiency, which has helped Tyson improve its gross margins, pushing income and book value up significantly.
Increased freight costs will likely cause earnings per share to finish at the low end of guidance - $6.55 to $6.70. Even so, annual earnings growth should surpass 20%. Savings from lower tax rates will drive the majority of the improvement.
The company continues to make acquisitions. On Friday, Reuters reported that Tyson’s agreed to buy chicken nugget maker Keystone Foods LLC (which supplies McDonald’s chicken nuggets) for about $2.5 billion from Brazil’s Marfrig Global Foods (BSP:MRFG3, Financial).Â
Since a majority of the company’s revenue is derived from animal slaughter and processing, totalling 1.8 billion animals per year, it has been the target of social groups for everything from animal cruelty to climate change. This has led Tyson’s, under CEO Tom Hayes, to invest in animal-free alternatives. The company also rolled out new sustainability goals in rapid succession: First, it will remove antibiotics from all Tyson-branded chicken products and slash its greenhouse gas emissions 30% by 2030, not only internally but also across its supply chain. These initiatives are meant to help increase efficiency, but, if successful, additional good press will boost the stock as well.
Consumers still eat meat, especially chicken, so with the current price multiples all below historical averages, the stock is a decent bargain at this price. Tyson may operate in a highly commoditized sector, but, as the industry leader, the company enjoys brand recognition and the ability to raise prices with inflation. In just one scenario, if the company earns north of $7 a share in 2019 and the market re-evaluates the price to 14 to 15 times earnings, the price will settle above $100.
Disclosure: I am not long or short any stocks mentioned in this article.
