EUR 850.00 For Business Accounts Only

Morningstar | Macro Tailwinds Set to Improve Prospects for No-Moat Tyson

With a diverse portfolio of protein businesses--beef (20% of profit), chicken (35%), and pork (15%)--combined with its mix of packaged foods (30%), we believe Tyson is more insulated from the volatility in revenue and earnings that tends to plague more commoditized meat processors. However, while proteins are generally on trend with consumers, most of Tyson’s products are undifferentiated and therefore difficult for them to command a price premium and higher returns. Further, several factors out of the company’s control affect costs, either directly or indirectly (weather, herd/flock health, global trade), which can constrain profitability from time to time. And although Tyson is the largest U.S. producer of beef and chicken, we do not believe this affords it a scale-based cost advantage, as its segment margins tend to be in line with or below those of its smaller peers. The absence of a competitive advantage, in the form of either a brand intangible asset or a cost edge, leads us to our no-moat rating.Despite this, we applaud Tyson’s efforts to penetrate the prepared foods segment, which has increased the profitability and stability of the company’s earnings. These products are priced like typical packaged goods and thus tend to be more stable. Operating margins are 10%-12% compared with 2%-3% for beef and around 8% for chicken and pork. The 2014 acquisition of Hillshire Brands serves as the foundation for the segment, and Tyson has continued to expand its reach in this area. In 2017, it acquired AdvancePierre, a national producer of ready-to-eat sandwiches and snacks, which gives Tyson greater access to the convenience store channel. Then in November 2018, it purchased Keystone Foods, which increases exposure to global quick-service restaurant chains and provides access to the Asia-Pacific region, where Keystone derived around a third of its sales. While we anticipate that Tyson could bring more packaged-food businesses into its fold, we don’t expect it to abandon its commodity-protein roots.