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Tyson Foods: Fighting Through Tough Times

Meat as a food item is classified as essential, and as a result, the meat industry has gone through its fair share of trials and tribulations due to the Covid-19 pandemic.

The problems faced by meat producers include but are not limited to high rates of worker infection, plant shutdowns, working at reduced capacities, rising costs of sanitization and hygiene and disruptions in the meat supply chain as some farmers are unable to sell livestock for processing. The demand shift from food service to grocery retail has also impacted the industry-wide margins.

Despite these issues, leading U.S. meat producer Tyson Foods, Inc. (NYSE:TSN) managed to report a top-line growth and also declared a dividend for the recent quarter.

Company overview

Tyson Foods is one of the largest producers of processed chicken, beef, pork and other kinds of meat and protein-based food items in the United States. The company has a solid portfolio of brands such as Jimmy Dean, Hillshire Farm, Ball Park, Sara Lee, Aidells and State Fair, to name a few.

Tyson Foods has a wide distribution network and operates through grocery retailers and wholesalers, meat distributors, warehouse club stores, military commissaries, chain restaurants or their distributors, live markets, international export companies, plant and school cafeterias, convenience stores, hospitals and many more. Tyson Foods employs close to 141,000 people and is headquartered in Springdale, Arkansas.

Quarterly Results

Tyson Foods reported mixed results for the quarter ended March 31. The company reported revenue of $10.89 billion, which was above the analyst consensus estimate of $10.85 billion and a 4.3% jump as compared to the corresponding quarter of the previous year. The jump in the revenues was largely a function of acquisitions by the management because organic growth remains stiff after plant closures and meat supply chain disruptions.

EPS dropped to $0.77, which was below the analyst consensus estimate of $1.04. The plant closures and limited staff increased the cost of goods sold.

There has been a shift in demand away from restaurants, which provide relatively higher margins compared to grocery stores. Tyson Foods is fighting through these tough times and managed to resume limited production at its largest plant in Waterloo. Despite the drop in earnings, the management declared a quarterly dividend of $0.42 per share.

Pork and beef

Tyson Foods' business is broadly divided into four segments: chicken, beef, pork and prepared foods. While chicken has struggled with lower pricing and no significant rise in demand, the company's pork segment has performed very well in terms of pricing as well as volumes. The segment saw an increase in sales of 8% resulting from an increase in volume of 2% and a 6% increase in pricing. There was a higher domestic availability of live hogs and strong demand for pork products. The outlook for pork remains positive with a 5% increase in hog supplies in 2020 and lower costs.

Beef, the largest contributor to revenues, has also witnessed a similar trajectory of rising prices as well as volumes. While there are some concerns about the higher price affecting demand, Tyson Foods' beef sales grew by 2.7% in the recent quarter. There has been a visibly stronger demand for beef products and this is expected to continue with the company estimating a 2% increase in cattle supplies and strong profitability in its largest segment.

Key takeaways

The stock has seen some recovery, but overall it lost about a third of its market value in the past six months. The supply chain issues in the meat industry and the price uncertainties with respect to chicken are important factors to consider.

The company's current price-earnings ratio of 11.02 is among the lowest in the entire consumer packaged goods space, despite a strong return on equity of around 13.98%. The return on invested capita of 7.32% is one of the best margins in the industry.

This is perhaps the reason why hedge funds like Tom Gayner (Trades, Portfolio)'s Markel Gayner Asset Management have increased their stake in the company. The company's list of institutional holding includes promising names such as AQR Capital Management, Iridian Asset Management, Highline Capital Management and Mountaineer Partners Management.

The current dividend yield of around 2.7% and the five-year average yield-on-cost of 14.47% are truly phenomenal. Overall, Tyson Foods may be facing a tough macro at the moment, but I rate it as a buy from a long-term perspective.

Disclosure: No positions.

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This article first appeared on GuruFocus.