EUR 850.00 For Business Accounts Only

Morningstar | Trade headwinds should pressure Tyson's near-term results as foreign market access is curtailed.

With a large portfolio of hard-to-differentiate products and low margins in its core meat processing business, Tyson’s fortunes continue to be dictated largely by external dynamics (such as trade and commodities) rather than an economic moat. While the consumer’s secular shift toward higher-protein foods is a tailwind for the overall industry, Tyson has limited ways to capitalize on its brand equity aside from its prepared foods segment (about 20% of pro forma sales) and the cachet that it has with foodservice operators based on its high service levels. The industry is highly competitive, and economics can shift quickly with changing supply dynamics.Tyson remains an efficient processor and is better-positioned to weather isolated supply and demand shocks than its smaller peers due to its large presence across the three major proteins (chicken, beef, and pork), which often act as substitutes for one another, depending on prevailing prices. Though the power of diversification is curtailed somewhat due to the common feed sources underlying all three proteins (corn and soybeans), Tyson’s acquisition of Hillshire in 2014 and AdvancePierre in 2017 delivered efficiencies as well as a more differentiated product mix. Tyson’s protein orientation allows it to selectively participate in certain growth areas more than other food manufacturers, such as frozen meat-based offerings, which are growing faster than the frozen foods category as a whole.Despite its efficiency, much of what drives Tyson’s profitability is beyond its control. The firm buys the live cattle and hogs it needs on the open market, which limits Tyson’s risk by leaving the long-lead-time animal husbandry operations outside its purview, but fails to eliminate its feed cost exposure (expenditures influenced by factors as diverse as the weather and energy subsidies). However, Tyson raises most of its own chicken, and two thirds of the cost of raising a bird is feed. As operating margins are tight, in the low single to mid-single digits over the past decade, Tyson has little room for error. As such, we anticipate operating margins will remain in the high single-digits on average over the next 10 years.