Tyson Foods (TSN, Financial) is a company that many believe has no economic moat whatsoever, but whether that is true or not does not excuse the fact that Tyson is the largest meat producer in the U.S., dwarfing its closest competitor Hormel Foods (HRL, Financial) by more than 4 to 1 based on sales volume. However, Hormel trades at higher multiples across the board, and its market capitalization is $3 billion greater.
The company has four major segments of raw and value-added meat products: beef makes up 39% of sales, chicken 30%, pork 14%, and prepared food at 21%. Most of the company's revenue is booked domestically, with 12% of sales coming internationally. There may be a sweeping vegan and vegetarian movement across the U.S., but people are still eating meat.
The stock has had a rough go of it in 2018. After reaching an all time high at the end of 2017, it is down 29% this year despite what seems like pretty solid financial performance.
The company's brands include its namesake brand, Tyson, as well as the Wright, Jimmy Dean, Hillshire Farm and Ball Park labels. These brands accounted for more than $40 billion in total revenue during the last 12 months, out of which the company brought in $3 billion in net income thanks to tax benefits.
Going forward, 2019 net earnings will likely be around $5 per share, putting the earnings just shy of $2 billion. Tyson's current market cap is $21.5 billion, 0.5x sales. That's one-third of the industry average and one-fifth that of its smaller competitor Hormel Foods. The value the market is placing on Tyson's right now is ridiculous.
With an average return on equity close to 20%, annual sales continuing to grow, expected earnings in 2019 of $2 billion (earnings per share at $5.75 to $6.10), and a book value that has more than tripled in the last decade adds up (at least in my mind) to a rock solid business.
How difficult is it to get in the meat business? It's a great deal harder to buy land, raise livestock, and do all the additional work required than it would be for a team of average coders to recreate a cloud service, but Morningstar gives Salesforce (CRM, Financial) a wide moat while Tyson's gets none. Of course, external commodity trading plays a large part in the company's future, but people will still eat meat.
Tyson has strong brand equity from its prepared foods segment (20% of sales) and great respect with foodservice operators based on its high service levels and while it's true that the industry is highly competitive and economics can shift quickly with supply dynamics, the scale at which Tyson's operates is a competitive advantage.
The company has become more efficient with gross margins up nicely in the last five years. The majority of its costs go to goods sold, not R&D or SG&A, so operating income and net income are roughly the same. Tyson's capital spending is less than 50% of its net income, thus the company can distribute a portion of earnings back to shareholders without hindering future growth. From here, the dividend could easily double to $2.50 during the next five years and by 2028, investors could be earning a yield close to 9% based on today's share price. In the near term, if the stock was valued closer to its five-year average multiples, it would be priced between $72 and $93 a share.
Disclosure: I am not long/short any stock.
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