Tyson: Short-Term Concerns But Long-Term Outlook Intact
Despite the company's soft earnings and management change, we don't plan to make a significant change to our fair value estimate.
We do not plan to make a large change to our $55 per share valuation for no-moat Tyson (TSN) after it reported soft fourth-quarter earnings. In fiscal 2016, Tyson posted a 9.2% adjusted sales decline alongside a 7.7% adjusted operating margin, slightly lagging our 8.9% and 7.8% expectations, respectively. We had been more pessimistic than prevailing sentiment about Tyson’s long-term margin prospects as protein prices normalize and believed pre-announcement trading levels priced the stock to perfection. As a result, despite the post-earnings share price slide, we do not expect to make a significant change to our long-term outlook that calls for 3% revenue growth and 7% operating margins, on average, from fiscal 2017-25.
Tyson’s chicken segment (30% of fiscal 2016 sales) posted a 2.2% full-year top-line shortfall, which was near our 2.5% decline expectation. However, its fourth-quarter and full-year volume dips were troubling, especially as wholesale-to-retail ground beef spreads remain high, indicating consumers are not yet receiving the full benefit of cheaper cattle (we had expected top-line pressure to come from pricing, which was aided by mix changes to a greater degree than anticipated). We continue to project chicken’s low cost and health profile will mitigate pressure from beef and push poultry’s share of protein consumption higher at the expense of red meat, but further deterioration may alter our short-term view.
Tyson also announced Tom Hayes will succeed 56-year-old Donnie Smith as CEO at year-end. While Hayes’ succession is unsurprising after his elevation to the role of president in mid-2016, the timing is curious, especially after a soft quarter and amid an industry price fixing lawsuit. We do not expect a change in strategy or capital allocation practices, and are not changing our Standard stewardship rating. However, we are not enamored with share repurchases to date, as they were executed at prices well above the fair value of the equity.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Zain Akbari does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.