A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that produces, distributes and markets primarily chicken and also beef, pork, and prepared foods.
Pat likes the company’s growing revenues but warns that it depends significantly on growth by acquisition and is facing inflationary pressures, which are forcing it to raise prices. Labour availability has also been a problem due to COVID-19 susceptibility.
Tyson Foods Inc. (Symbol TSN on New York; www.tysonfoods.com) is the biggest U.S. chicken company. And as well as chicken, it produces, distributes and markets beef and pork, along with prepared foods. The company’s products are marketed and sold primarily by its own sales staff to grocery retailers, grocery wholesalers, meat distributors, military commissaries, industrial food-processing companies, chain restaurants, international export companies and domestic distributors.
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Founded in 1935 by John W. Tyson and expanded under three generations of family leadership, the company has a broad portfolio of products; its brands include Tyson, Jimmy Dean, Hillshire Farm, Ball Park, Wright, Aidells, ibp and State Fair.
Headquartered in Arkansas, Tyson boasts that the majority of its production is certified as antibiotics free at all levels—from feed cultivation to chicken and cattle rearing. Its integrated operations consist of breeding stock, contract farming, feed production, processing and further-processing, marketing and the transportation of chicken and related specialty products. Those niche offerings include animal and pet food ingredients.
Through its wholly owned business Cobb-Vantress, Tyson is one of the leading poultry breeding stock suppliers in the world. The company believes that investing in breeding stock research and development lets it breed into its flocks the most desirable characteristics.
Tyson also processes live fed cattle and hogs and fabricates dressed beef and pork carcasses into various meat cuts, case-ready beef and pork, and fully cooked meats. In addition, it derives value from specialty products such as hides and a variety of meats sold to further processors and others.
Meanwhile, the company provides a wide range of fresh, value-added, frozen and refrigerated food products. Its products are marketed and sold primarily by its own sales staff. They deal directly with the grocery retailers, grocery wholesalers, meat distributors, warehouse club stores, military commissaries, industrial food processing companies, chain restaurants and their distributors, live markets, international export companies, and domestic distributors for restaurants and foodservice operations like convenience stores and hospitals.
Additionally, sales to the military and a portion of sales to international markets are made through independent brokers and trading companies.
Tyson has grown by acquisition over the years.
Its biggest deal was the August 2014 purchase of The Hillshire Brands Company for $8.6 billion. Hillshire was a leader in branded, convenient foods, with a vast portfolio of brands: Jimmy Dean, Ball Park, Hillshire Farm, State Fair, Sara Lee frozen bakery and Chef Pierre pies. Its artisanal brands include Aidells, Gallo Salame, Van’s Natural Foods and Golden Island premium jerky. Tyson subsequently sold off the Sara Lee brand in 2019.
In April 2017, the company acquired AdvancePierre Foods for $4.4 billion. The move expanded its portfolio of prepared foods and protein-packed brands. AdvancePierre was a leading U.S. producer of ready-to-eat lunch and dinner sandwiches, sandwich components and snacks. Its customers included foodservice, retail and convenience store suppliers.
Next was the company’s August 2018 acquisition of Keystone Foods from Marfrig Global Foods for $2.2 billion. Keystone supplied many of the world’s largest quick-service restaurant chains. For example, it was a major provider of chicken nuggets to McDonald’s. Other products include beef patties, ready-to-cook chicken wings, and fish filets.
The Keystone purchase further shifted Tyson’s business toward higher-profit-margin products, such as chicken nuggets and fish filets, and away from slabs of non-branded, commodity meat, which tend to be less profitable and prone to market swings. The acquisition also boosted Tyson’s sales to restaurants.
In July 2021, to sharpen its focus, Tyson completed the sale of its pet treats business to General Mills (symbol GIS on New York). The $1.2 billion sale included the Nudges, Top Chews and True Chews brands. The business had annual sales of around $240 million. Notably, Tyson will continue to supply meat ingredients for True Chews, Nudges and Top Chews pet treats.
Inner Circle: Post-COVID revenues have bounced back
Tyson’s overall revenue increased slowly but steadily over the last five years, up 17.1% from $36.89 billion in 2016 to $43.19 billion in 2020. Earnings improved 19.3%, from $1.77 billion, or $4.53 a share, in 2016 to $2.11 billion, or $5.78, in 2020.
Going forward, the company faces both risks and opportunities.
There is considerable risk in continuing to rely on acquisitions for growth. Also, despite its rising sales and profits, Tyson is facing rising inflation, like many other manufacturers. In the near term, the company’s rising costs may continue to outstrip its ability to increase its selling prices to customers and consumers. Note, it has already raised prices for its foodservice customers and is now raising prices for its retailer customers. Further increases in the short term would likely cost it market share.
Labour shortages are another big issue in the meat industry. However, to address this, Tyson aims to make its facilities an attractive place to work. The company pays its frontline workers an average $22 per hour, including full medical benefits. Tyson is also piloting flexible work schedules at its production facilities and has introduced health clinics at seven locations to allow easy and free access to medical care. It’s also piloting childcare programs and providing access to vaccinations for all its U.S. workers.
Looking at its COVID prevention strategy—and meat plants are particularly vulnerable to outbreaks—effective January 1, 2022, fully vaccinated employees were set to begin earning up to 20 hours of paid sick leave per year. Vaccinated new hires will also receive one week of vacation after six months of employment. In addition, the company is giving $200 as a thank you to fully vaccinated frontline employees as well as handing out more than $6 million in sweepstakes money to incentivize vaccinations among staff.
Still, the company has wide product diversification, with leading market-share positions in beef, chicken, pork, and prepared foods. Moreover, Tyson’s steady move into valued-added prepared meats, snacks and so on will boost profit-margins. The company’s shares yield 1.9%, and its dividend appears safe.
Recommendation in Pat’s Inner Circle: Tyson Foods Inc. is a hold