Consumer Staples Tyson Foods, Inc. (NYSE: TSN ...
Transcript of Consumer Staples Tyson Foods, Inc. (NYSE: TSN ...
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Krause Fund Research
Fall 2016
Consumer Staples Recommendation: HOLD
Analysts
Gyuho Chad Cha [email protected]
Mengjiao Yu [email protected]
Company Overview
Tyson Foods, Inc. (TSN) is an American multination
company founded in 1935. Its headquarters is located in
Springdale, Arkansas and operates in the food processing
industry. The company is the largest meat processor with
subsidiaries including Jimmy Dean, Hillshire Farm, Sara Lee,
State Fail, Ball Park, and Wright. In 2014, the company
acquired Jimmy Dean and Ball Park and sold its poultry
businesses to its competitor, JBS S.A. for $575 million to
focus on the domestic market. As of the end of fiscal year of
2015, it hires more than 113,000 employees and operates 123
facilities.
Stock Performance Highlights 52 week High $77.05
52 week Low $48.52
Beta Value 0.66
Share Highlights Market Capitalization $25.16 b
Shares Outstanding 297.45 m
EPS (ttm) $4.11
Forward P/E Ratio 13.81
Dividend Yield 0.9%
Dividend Payout Ratio 13.3%
Company Performance Highlights ROA 8.19%
ROE 16.82%
Sales (Fiscal Year 2015) $41.37 b
Operating Margin (Fiscal Year 2015) 5.2%
Operating Margin (3Q 2016) 9.6%
Quarterly Earnings per Shares
Date
Reported EPS
EPS
Forecast
%
Surprise
11/23/2015 0.83 0.9 -7.78%
2/5/2016 1.15 0.87 32.18%
5/9/2016 1.07 0.96 11.46%
8/8/2016 1.21 1.07 13.08%
Source: Nasdaq
Tyson Foods, Inc. (NYSE: TSN)
December 2, 2016
Current Price: $56.12
Target Price: $59.00 – $65.00
Enhanced Operating Margin with
Pending Lawsuit
Adjusted EPS in 3Q 2016 was increased by 51% from Q3
2015. Tyson Foods also increased full 2016 ESP guidance from
$4.40 - $.50 to $4.47 - $4.57
Total sales had been declined compared to the previous 3Q,
but operating income was increased by 36%.
Beef segment showed signs of recovery. The beef segment
reported -0.2% operating margin in Q3 2015 and it was increased
to positive 2.4% in Q3 2016.
Although chicken sales had been decreased, its operating
income was increased due to the enhanced operating margin. Its
operating margin was increased from 11.4% in 3Q 2015 to 13.9%
in 3Q 2016.
Pork Segment recorded the highest increase in operating
margin in Q3 2016. Its operating margin was 5.3% in Q3 2015
and increased to 9.6% in Q3 2016.
Pending lawsuit of chicken price fixing is assumed to have a
great impact on Tyson’s stock price. Its operating income for
chicken sector has been adjusted.
One Year Stock Performance as of 12/2/2016
Source: Bloomberg
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EXECUTIVE SUMMARY
We recommend to hold Tyson Foods stock due to recent lawsuit
of chicken price fixing. The lawsuit alleges that chicken price is
manipulated by producers in U.S. including Tyson Foods. Even
though Tyson Foods has been tried to reduce its dependency on
chicken sector but still the chicken sector accounts for the biggest
operating income among four major business sectors. We adjusted
the operating margin in chicken sector and lowered the target
price.
ECONOMIC OUTLOOK
We believe there are five key economic drivers that affect the
consumer staples sector. They are gross domestic product,
unemployment rates, consumer confidence, interest rates, and
inflation.
Gross Domestic Product
Gross Domestic Product (GDP) is the total monetary value of
goods and services produced within a nation’s borders in a given
time period. GDP functions as an indicator of economic health.
Typically, when the nation's GDP increases so does the S&P 500,
as indicated in the graph below.
GDP vs SP500
Source: Bloomberg
Currently, Consumer Staples is one of the most expensive areas
as market has been defensive for last four years, and it is also a
non-cyclical sector, which means their stock prices tend to do well
when GDP lags and when GDP is strong. 1 This is because their
products typically have a low-price elasticity of demand.
However, there are enough substitutes that suppliers have
difficulty raising prices. Instead they must focus on differentiating
their products. During times when GDP and the overall economy
are strong, name brands tend to do better than private labels.
When GDP is lower and the overall economy doesn’t perform
well, the reverse is true. We saw these trends after great recession
as private label spending decreased 10% from 2009-2012.2
GDP Growth Rate
Source: FRED
Since the great recession, GDP has been on a slow, but positive
growth trajectory, as seen in the graph above. In the third quarter
of 2016, real GDP rose to an annualized rate of 2.9% from 1.4%
in the second quarter.3 We expect GDP to increase at a
conservative rate of about 2.1% over the next 3 years.
Unemployment
Unemployment, similar to GDP, is one of the first indicators of
economic health. As mentioned above, consumer staples tend to
be in high demand regardless of economic strength thanks to the
necessity of their products (e.g. food, beverages). However,
consumers will shift their spending to low-cost private label
brands as unemployment increases.
The graph below shows US civilian unemployment levels over
the previous 10 years. Since the great recession, unemployment
has been cut by more than half and now lies at 4.9%.4 As
unemployment falls, wages tend to increase. According to
Bloomberg, wages increased by 0.4% in July of 2016, which
allows for increased consumption of consumer staples, especially
name brand goods. We expect unemployment to remain around
4.9% over the next 6 months, with a slow drop to 4.75% in the
longer term. With the decreasing of unemployment rate, the
consumer power will relative has an increase, which will increase
the sale of our sector.
Unemployment Rate
Source: FRED
Consumer Confidence
The consumer sentiment index is based on a phone questionnaire
of 5000 U.S. citizens to gauge the health of the U.S. economy
from the point of view of the average person. Each caller answers
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GDP SP500
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questions on three economic categories: their own situation, their
view on the short-term economy and their view on the long-term
economy. It is created to assess the near-term customer outlook
on personal finance and household spending. The data collected
in this poll is used to help evaluate the level of consumer optimism
or pessimism. The stock market is effected by the data from this
index either negatively or positively. If consumer sentiment has
increased, it means that consumers are optimistic about the health
of the U.S. economy and will spend more money on discretionary
goods. This is usually a good thing for the stock market. If
consumer sentiment has decreased, it means that the average
consumer is pessimistic about the future of the U.S. economy
which usually results in a decrease in the overall stock
market. However, changes in in consumer sentiment have a
minimal effect on the price of stocks in the consumer staples
sector as consumers tend to buy staple products regardless of the
economic environment.
Historically, the consumer sentiment survey has been a bit of a
lagging variable behind the general market trend. Looking at the
graphs below it is visible to see that the index generally falls
below 100 during times immediately following large drops in the
stock market and in the period right after as people are
more cautious about their discretionary spending. As noted
in earlier, consumer sentiment does not have a large influence on
the price of consumer staples stocks due to the necessity of the
goods purchased at any time during the business cycle. That is
confirmed by looking at the below graph which shows that when
the consumer index was above 100, consumer staples prices were
primarily stagnant, and following the financial crisis consumer
staples increased in value although consumer sentiment was
low. Currently, the consumer sentiment survey as of November is
91.6, which means that the average U.S. citizen is pessimistic
about the direction of the economy.
Consumer Sentiment Survey vs SP500
Source: University of Michigan
Barring sudden changes to the overall trend the market has shown,
we forecast that consumer confidence will continue to rise as the
consumer confidence index continues above 100 in the zone of
economic optimism, we would expect that the consumer staples
index to begin to stagnate as we saw between the years of 1998
and 2008. As consumers become more optimistic in the economy
and spend more in other sectors of the economy, investors will
flock to those other areas.
Interest Rates
The Federal Reserve has the ability to change the interest rates at
which commercial banks can borrow money from them. By
changing this rate, the Fed can increase or decrease the supply of
money in the economy, which has an immediate effect on
inflation and slight lagging effect on GDP growth. If commercial
banks are able to borrow money more cheaply, it means that they
are able to lend it to consumers at a lower rate as well. This entices
consumers and businesses to borrow money to make big
purchases like cars, houses or capital investments, which is bene-
ficial for the economy. Because of the benefits this brings to the
economy, when the Fed decreases the federal funds rate, the stock
market will usually increase. Due to the low betas of consumer
staples companies, a decrease in the federal funds rate has a
positive, yet lesser influence on the price of those stocks. This is
true especially because a lower interest rate generally influences
more long-term investments, which are generally not considered
staples.
In response to the general market outlook does the FOMC change
rates. If they believe that the economy is growing too rapidly, then
they will raise rates to attempt to reduce the supply of money in
the marketplace to reduce capital investment and vice versa if the
economy is slowing. Historically especially in recent decade, the
federal funds rate was lower than 5%, especially, since the great
recession the FOMC has set the rate at record lows. In 2015, Fed
rate was raised from 0% to 0.25%. In response to these all-time
lows the market, and the consumer staples sector has been
growing incredibly quickly. The S&P 500 has even reached a new
all-time high. As we've seen in the past from a rising stock market,
it is expected that the Fed will increase rates to attempt to slow
down the growth of the economy. Although there has been much
speculation during last few months' meetings, the Fed has
generally kept the rate the same amidst global economic
uncertainty. Currently the effective federal funds rate stands
at 0.5%
Federal Funds Rate vs SP500
Source: Bloomberg
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Consumer Stapes vs Federal Funds Rate
Source: Bloomberg
Due to the most recent FOMC meeting and speech regarding their
proposed intentions, there is much speculation about another rate
hike in the near future. Albeit a small rate hike is most likely to
occur in the next few months, the markets are already trying to
price in the effect that such a hike would do to the bottom lines
for the companies of the U.S. market. We are expecting an
incremental hike in the next few months. This will have an effect
of decreasing the rate at which the S&P 500 has been increasing
as well as the rate at which the consumer staples companies have
been trading. If a rate hike were to occur, firms would be paying
more for capital investments and consumers will be paying more
in interest rates for things like cars and houses. Due to
this, we expect a small decrease in the rate at which the consumer
staples sector has been increasing at 0.75%
Inflation
Inflation is the rate at which the general level of prices for goods
and services is rising, and, consequently, the purchasing power of
currency falling.5 Consumer Price Index (CPI) and Producer Price
Index (PPI) are both measures of inflation. The CPI represents a
weighted average price of a basket of consumer goods and
services. CPI is the most reliable indicator of inflation and is under
close watch as it shows that inflation is at a 16-year low.6
According to the U.S. Bureau of Labor Statistics report, over the
last 12 months, the CPI inflation rate rose 0.8 percent before the
seasonal adjustment.7 When the inflation rate rises, the purchasing
power of currency is falls. When there is a moderate inflation rate
which is between 0%-2%, a higher CPI is better for the consumer
staples sector. CPI will influence the cost of our sectors a lot. With
the CPI increased, the inventories cost will increase, in order to
keep profitable, consumer staples companies will increase their
product price as well. If the price only rises up a little and the
demand for customers will not be significantly influenced, the
companies will realize higher profit. If there is an uncontrolled
increasing inflation rate, the price of goods is sustained growth,
the demand of customers will decrease. All in all, the net profit of
companies will have a negative influence.
Source: Bureau of Labor Statistics
The PPI is a family of indices that measure the average change in
selling prices received by domestic producers of goods and
services in the three stages of production: crude goods,
intermediate goods, and finished goods.8 Because PPI is reported
before CPI, it can show signs of inflation before the CPI index.
PPI is important because it affects the input costs, which affects
selling price and revenue. A lower PPI is better for the consumer
staples sector because it signifies lower input costs, thus leading
to higher margins and higher revenues. From Chart 1 below, we
can see that the total final demand and total final demand for
goods is -0.4%. This decrease is largely attributable to the total
final demand for food falling -1.1%. 9 These data show that the
input costs are reduced for most consumer staples companies.
One-month percent changes in selected PPI final demand
price indexes
Source: Bureau of Labor Statistics
We expect that in 6 months the CPI inflation rate will decrease to
0.5% because we believe the Federal Reserve is likely to raise the
interest rate by the end of the year. However, in 2-3 years we
believe the CPI inflation rate will steadily increase to 1.8%, which
will be close to the Federal Reserve target of 2%.
CAPTIAL MARKET OUTLOOK
We believe that the market will grow at a rate of 2.1% over the
next 2-3 years. The consumer staples sector would benefit from
the low growth rate since it is considered a relatively safe asset
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Final demand Final demand goods Final demand Service
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compared to other sectors. The demand for consumer staples is
inelastic and constant because consumers are unlikely to change
their budget for food. Since consumer staples have a low beta of
.68 historically, it is always preferable to be included to diversify
portfolios.10 This sector can mitigate the loss during recession and
even make profits by adjusting its volume due to its high dividend.
We believe it is a good time to invest in consumer staples since
the risk tolerance of investors has decreased over years of market
fluctuations. The consumer staples sector will not outperform the
market going forward since the economic variables show that the
market is in recovery. Since the demand for consumer staples is
inelastic and not well-correlated to the market, its performance
would not benefit from the recovering market as much as other
sectors.
INDUSTRY ANALYSIS
Industry description
Food Products is an industry within the Consumer Staples sector,
it holds 20% weighting (based on market capitalization) of
consumer staples. Food Products is comprised of two sub-
industries: agricultural products and packaged foods & meat.11
The agricultural products include crop growers, owners of
plantations and companies that produce and process foods but do
not package and market them. The packaged foods & meat is
producers of packaged foods including dairy products, fruit
juices, meats, poultry, fish and pet foods.
Source: NetAdvantage
Industry Trend
As consumers become more concerned about their health, food
industry shifts its focus on organic foods. Organic food market
has been growing fast recently and it is expected to grow
continuously 14% by 2018.12 The biggest challenge to companies
in Food Product industry is that they need to balance the cost of
producing organic food with the profit and access to enough
supply of organic inputs. Companies have focused more on fewer
items and established the brand names to outrival their
competitors.
Commodity Price Risk Management
The meat processing companies are exposed to commodity price
risk since it is the main component of the cost of goods sold.
Below are the lists of companies which directly compete with
Tyson Foods and how they manage the commodity price risk.
Tyson manages this risk through the use of derivative
financial instruments, foreign currency risk, and interest
risk. 13 They also operate own farms and enter long term
contracts with suppliers to reduce the uncertainties about
the future price.
Pilgrim periodically seeks to enter into purchase
commitments or financial derivative but has not
designated the derivative financial instruments to
mitigate commodity price risk.14
Sanderson Farms periodically enter into contracts to
purchase feed ingredients but it doesn’t use derivative
financial instruments or purchase market risk sensitive
instruments. 15
Consumer Demographics Trend
Hispanics
The population of Hispanics in U.S. is growing faster than any
other non-Hispanics. Their home dinning trend started to have
influence on the food product industry. Companies have released
Hispanic packaged food to attract the fast-growing population.
Aging Baby Boomers
The aging baby boomer generation is concerning more about
healthy food. They are concerned about low saturated fat,
cholesterol, and sodium and high in whole grains, protein, and
calcium.16 Also, they are substituting red meat with other protein
food products since read meat is closely related to heart disease
and cancer. The market must follow this changing trend of the
aging baby boomers since there are 76 million estimated living in
the U.S. today.17
Red Meat Sales vs Poultry Sales in U.S.A
Source: USDA
Agricultural Products,
2%
Household Products,
19%
Brewers, 1%
Distilers & Vintners, 2%
Drug Retail, 9%
Food Distributors,
1%
Food Retail,
3%
Hyper Markets &
Super Centers , 9%
Packaged Foods &
Meats, 17%
Personal Products,
2%
Soft Drinks, 20%
Tobacco, 17%
Consumer Staples Sector Breakdown
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Smaller Households
Consumers have become more individualized in the U.S.
Currently, more than 50 percent of eating and beverage occasions
happen when consumers are alone.18 Also, 27 percent of
consumers are dining alone according to the Census Bureau.19 The
individualized consumer group has affected the food industry and
has had forced the packaged food industry to adjust their products
in response to the new trend. In 2015, Tyson had successfully
caught the trend increasing its packaged foods sales from 3.9
billion in 2014 to 7.8 billion.20
Packaged Food Revenue Changes
Source: Euro monitor & Fact Set
Porter’s Five Forces Analysis
Industry Rivalry
The food products industry has $453,839 of total market cap as of
4/13/2016. In 2015, Kraft Foods and H.J. Heinz merged and
formed the largest company in the food products industry with
Kraft Heinz, the largest company, merged with holding a 21%
weighting. The second largest company is Mondelez International
with 14.5% weighting. The top 10 largest companies account for
a combined 78.4% market share in the food products industry.21
Food Products: Major Players as of 4/13/2016
Source: NetAdvantage
Threat of New Entrants: Medium and Steady
The new company must pass the approval from the U.S.
Department of Agriculture and Environmental Protection Agency
to start business. Both departments have a strict standard to
protect and promote public health.22 Also, since preexisting
companies in Food Product industry made the long-term contract
with suppliers, it is difficult for newly entered companies to find
the new suppliers. Tyson Foods has entered long term contracts
with various independent farmers. It had made more than 3,800
contracts for chicken, 3,770 for beef, and 2,100 for port in 2015.23
Threat of Substitutes: High
The treat of substitute is high in this industry since the market is
fully saturated. Customers can easily find substitutes for Tyson
Foods’ products in the stores. Even though the food products are
differentiated but they are still substitutable by other products. To
reduce the threat, Tyson Foods has focused on establishing the
brands name. Their brand strategy is using the merged company’s
brands to maintain the relationship with existing customers.
Bargaining power of buyers: High
The buyers have more power since there are many substitutions
are available in the market. Customers often demand for lower
price or healthier food and if Tyson Foods cannot meet their
requirements at right time, its customers will switch to other
brands without any additional cost.
Bargaining power of suppliers: Low
To reduce the power of suppliers, Tyson Foods has made long
term contracts with suppliers. Since Tyson Foods is the largest
meat processing company, the suppliers have less power to
negotiate. According to Tyson Foods, the average length of the
contracts is 15 years which makes it have more bargaining power
than other competitors such as Sanderson Farms and Pilgrims
which enter long term contracts only periodically.24
Catalysts for Growth/Change
Consumer demand
According to the World Databank, the population of USA keeps
0.8% growth rate in recent years, and 1.2% in world. The
increased number of people means that he sales of food especially
of necessaries like meats will grow as well.
Population Growth: U.S. vs World
Source: World Development Indicators
Furthermore, the consumption of middle class and rich people in
emerging markets such as India and China keep increasing and
predict to increase more in future. After the election of US in
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330.
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Gross Market Value (B)
Tyson's Package Foods revenue (MM)
Others, 22%
Kraft Heinz, 21%
Mondelez Internation
al, 15%General
Mills, 8%
Kellogg, 6%
Tyson Foods, 6%
Archer-Daniels-Midland,
5%
Hormel Foods, 5%
Conagra Foods, 5%
Hershey, 4%
Campbell Soup, 4%
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2016, the tax is expected to be decrease and will increase the
purchase power of middle class.
Shares of Global Middle Class Consumption, 2000-2050
Source: World Bank
Food safety and health
People have high attention to the food safety all the time.
According to a survey, consumers now link health, wellness, and
industries transparency with their definition of safety, and include
factors such as free from harmful ingredients (62%); clear and
accurate labeling (51%); and fewer ingredients, processing, and
nothing artificial (42%).25 The food products industry is
comprised of agricultural products and packaged foods & meat,
which means this industry is much more likely to be impacted by
consumer concerns. If there is an exposure that shows food is
unsafe, this kind of scandal will affect sales dramatically.
Today, the health and nutrition for food is another key selection
criterion for people. For example, the organic food becomes a
popular and profitable business. More and more traditional food
companies such as General Mills are trying to diversify their
portfolios to organic and natural food. In addition, more and more
people becomes vegan or vegetarian. In 2009, a tiny one percent
of the US population reported eating vegetarian or vegan. In
2015, 5% of the United States population is vegetarian and half of
those people are vegan, and the number is keep rising. However,
veganism is not just for women. The outcome consumption of
meat because of the increasing number of vegetarian will
decrease.26
Emerging market
Established markets still generate high profits for package food &
meat companies. However, because of the high economic
development of Latin American and Asian Pacific countries, these
countries also can bring profits for food product industry.
Emerging markets are relatively underfed and the population in
emerging market is huge. In countries like India and China, cheap
labor force and plentiful farmland are the favorable conditions for
the food products industry companies to expand.27
Investment positives and negatives
Positive
The food products industry is a relative mature industry in
consumer staple sector. Food industry provides the necessities
through its product diversity. Because food is a daily consumption
for people, most of the time it will not be serious influenced by
the economy. The food products industry historically produces
gross margins in the 18%–26% range (22.7% average from 2006
to 2015). Normalized net income for the food products industry
increased 40.0% between 2005 and 2015 and rose at a CAGR of
3.4%. Food products industry interest coverage improved from a
10-year low of 4.1x in the third quarter of 2006 to a high of 9.6x
in the fourth quarter of 2013.28 This stable growth and ample
interest coverage makes the food products industry the safe choice
for the investors during major economic and stock market
downturns.
Negative
Although the food products industry is a relatively stable market,
some uncontrolled situations also will influence its growth. For
example, agricultural products reduce on its harvest if there is
harsh weather due to climate change. Furthermore, food product
industry is a mature industry, so it is difficult for companies to
have great innovation and prompted sharp rising of stock prices.
Financial Statistics of Leading Competitors in Food
Product Industry
Tyson JBS SA Sanderson Pilgrim's Hormel
Market Cap 28.03B 9.68B 2.12B 5.35B 19.34B
ROA 8.19% 4.57% 10.60% 15.54% 12.49%
ROE 16.82% 9.14% 12.97% 47.63% 20.02%
EPS 4.11 0.42 6.24 1.84 1.54
Revenue Per
Share
97.47 38.21 121.96 31.51 17.56
Profit Margin 4.28% 1.10% 5.19% 5.85% 8.96%
Operating
Margin
7.86% 4.00% 8.21% 9.49% 13.41%
P/E 17.84 17.03 15.08 11.42 23.73
P/S 0.73 0.18 0.79 0.66 2.08
P/B 2.86 1.37 1.86 6.56 4.4
Total Cash
Per Share
0.53 1.91 10.76 0.16 0.72
Source: Yahoo Finance
Profit margin and Operating margins are the most important
statistics to evaluate the companies in Food Product industry since
the market is fully saturated. If the firm cannot generate revenue
efficiently, it can operate business in long run. So the except JBS
SA, four companies in the table above are in our investment list.
They have succeeded to differentiate from other competitors and
increased operating margin in the highly competitive market.
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COMPANY ANALYSIS
Company Overview
Tyson Foods, Inc. is an American Corporation operates as a food
company worldwide with leading brands such as Tyson, Jimmy
Dean, Hillshire Farm, Sara Lee, Ball Park, Wright, Aidells and
State Fair. The company was established by John W. Tyson in
1935.29 In 2001, it had expanded its business segments by
acquiring IBP, Inc. which had the largest market share in beef
packer and the second in pork processor business in the U.S to
expand the business segment. In 2014, Tyson acquired the maker
of Jimmy Dean sausage and Ball Park hot dogs for $8.5 billion.30
In July 2014, the company sold its poultry business in Mexico and
Brazil to focus on the domestic market.31 It generated $40.6
Billion in the fiscal year of 2015 with 113,000 employees.
Its main four business segments are Chicken, Beef, Pork and
Prepared Foods. The company raises and processes chicken
products; process live cattle and live hogs; and fabricates beef and
pork carcasses into meat cuts. The company produces from fresh,
value-added food to frozen and refrigerated food products.32 The
products are primarily sold to grocery retailers, grocery
wholesalers, meat distributors, warehouse club stores, military
commissaries, industrial food processing companies, chain
restaurants or their distributors, live markets, international export
companies and domestic distributors who serve restaurants, food
service operations such as plant and school cafeterias,
convenience stores, hospitals and other vendors. 32
Product Lines, Raw Materials, and Sources of
Supply
Source: Fact Set
Source: Tyson 10Q 2016
Chicken
Tyson processes live chickens into fresh, frozen and value-added
chicken products. Chicken products are distributed domestically
to food retailers, wholesalers, food service establishments such as
schools, the military and other food processors, as well as to
international markets.32 Since it raises chicken itself, chicken
products are less volatile than other segments. This segment is
also expected to grow faster since consumers are replacing red
meat which is linked to heart diseases and other health issues. As
of 3Q 2016, chicken segment had recorded the highest operating
income and margin among the four business sectors.
Tyson Foods has focused on reducing its exposure to the price
fluctuation of chicken from suppliers. To reduce this risk, Tyson
Foods has entered long term contracts with farmers. Other
competitors such as Sanderson Farms and Pilgrims only enter the
contracts periodically since their market caps are much smaller
than Tyson’s.33 The average length of the contracts is 15 years
which guarantee the stable chicken supply at the fixed price.
However, the dependency on chicken products is expected to
decrease going forward because it is assumed that the recent
pending lawsuit will affect the chicken sector. The lawsuit claims
that consumers have been paying 50% more because of artificially
manipulated price. The operating margin for chicken sector is
adjusted to be lower.
Beef
The company processes live cattle and fabricates dressed beef
carcasses into primal and sub-primal meat cuts and case-ready
product. 32 This product is also distributed throughout the same
distribution channel as chicken segment. The beef segment of
Tyson Foods is more volatile than chicken since its supply is
dependent on independent contractors. To reduce the volatility,
the company has entered risk-sharing and procurement
arrangements with suppliers. 32
As of Q3 2016, Beef food products account for the largest
percentage of the sales but it had recorded the lowest operating
margin among the four segments. The beef segment is highly
sensitive to price change since even a slight increase in price
makes consumers shift away from beef to chicken or lower-priced
meats according to Tyson Foods CEO Donnie Smith.34 However,
41% 43% 41% 39%
35% 30% 27% 29%
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2013 2014 2015 2016 - 3Q
Sales by Segment from 2013 to 3Q 2016
Beef Chicken Prepared Foods Pork
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14%
16%
Beef Chicken PreparedFoods
Pork
2016 3Q Operating Income & Margin
Operating Income Operating Margin
9
it is operating income had increased from $ -7 million in 3Q 2015
to $91 million in 3Q 2016. The beef segment is expected grow at
2% in Q4 2016.
Pork
Tyson processes live hogs and fabricates pork carcasses into
primal and sub-primal cuts and case-ready products.32 This
product is also distributed throughout the same distribution
channel as chicken and beef segment. Pork segment has lower
volatility than beef segment does since it has more secured
suppliers. It employs hog buyers who make purchase agreements
of various time durations as well as purchase hogs daily. 32 Also,
it raises a small number of swine for its processing needs.
As of 3Q 2016, pork products account for 13% of the sales and it
is expected to increase in 2016. In last year, the demand for pork
was strong and volume was up 3.1% compared to 2014. 35 Tyson
has expanded its pork food product variations by acquiring
Hillshire Company and increased its hog supplies in 2016. The
operating margin is expected to be above its normalized range at
around 10%. 35
Prepared Foods
Throughout acquisitions, Tyson has increased its Prepared Foods
products variations. Tyson announced its plan to reduce its
dependence on shrink-wrapped fresh meats and invest more in
packaged-food products to follow the trend.36 As shown above in
the Sales Segment table, its sales had been almost doubles from
2014 to 2015. Tyson had successfully followed the new trend of
smaller households so the growth rate is expected to grow
constantly even though it was stabilized in 3Q 2016.
New Products
Tyson’s success is dependent on anticipating changes in
consumer preferences and dietary habits and successfully
developing and launching new products and product extensions
that consumers want.32 One of the ways of developing new
products is acquiring an existed company. In September 2016,
Tyson Foods plans to launch an extension of the Hillshire
snacking platform and roll out the Tyson Naturals line of frozen
chicken products, which feature all-natural ingredients and no
antibiotics ever.37 The new products reflect changes in consumer
trend since consumers are more concerned about organic food and
replacing red meat which causes heart diseases. Also, Tyson
Foods announced to work with Amazon Fresh on a new line of
meal kits called Tyson Taste Makers.38 The new product has high
quality which consumers cannot easily substitute it so the demand
is less sensitive to the price fluctuations. Also, the new product is
distributed only throughout e-commerce grocery service which
would reduce its high dependency on the wholesalers such as
Wal-Mart and the distribution cost.
Corporate Strategy
In 2016, Tyson Foods has expanded a new business sector. It has
introduced True Chew, a line of beef, chicken, and ham-flavored
dog treats to penetrate pet food market.39 However, it is expected
to generate only small portion of revenue, since it is still in
fledging.
Also, Tyson has expanded its product lines by acquisitions. One
of the key acquisitions was Hillshire Brands which is expected to
create synergies of about $700 million in fiscal 2017.40
Tyson Foods also has more facilities compared to its meat
processing competitors. Tyson Foods has a lower transportation
cost per food products and high market share since their facilities
are located close to highly populated areas and outnumber the
competitors.
Tyson Foods Facilities Locations in U.S.A.
Source: TysonFoods.com
Sanderson Farms Facilities Locations in U.S.A.
Source: SandersonFarms.com
Recent Earnings Release
In 3Q 2016, Tyson Foods generated sales of $9,403 million and
operating income of $767 million. Although volume had
decreased from previous 3Q, port sales had increased in fact
because of its increased price.
10
Sales Changes from 3Q 2015 to 3Q 2016 Sales Volume
Change
Avg. Price
Change
2016 2015
Beef 3783 4305 2.90% -14.60%
Chicken 2743 2757 -0.90% 0.40%
Prepared
Foods
1809 1810 1.90% -1.90%
Pork 1271 1207 -1.70% 7.20%
Source: Tyson 10Q 2016
The chart below shows the operating income changes from 3Q
2015 to 3Q 2016. Operating income is more accurate indicator to
evaluate performance of each segment since sales do not include
the cost.
Operating Margin/Income Changes
from 3Q 2015 to 3Q 2016
3Q Operating
Income
Operating Margin
2016 2015 2016 2015
Beef 91 -7 2% 0%
Chicken 380 313 13.90% 11.40%
Prepared
Foods
197 207 10.90% 11.40%
Pork 122 64 9.60% 5.30%
Source: Tyson 10Q 2016
Beef segment shows a negative number in 3Q 2015 which means
that as Tyson operates business in beef industry, it loses its
money. The main reason of the negative number is the imbalance
between supply and demand of feeder cattle in 2015. Compared
to chickens and hogs, feeder cattle take more time to be grown
enough to be processed. This leads to the reduced sales volume of
beef segment and the increased price of beef made consumer shift
to chicken or other protein sources.
Loss in beef segment is not just Tyson’s problem. JBS SA, the
leading company in beef industry in U.S. also suffered loss of
$37.3 million for the fourth quarter of fiscal 2015. Since the
market is still too big to be ignored, the two major companies
likely compete each other to survive. However, they would focus
on cost-efficiency rather than increasing the volume.
Feeder Cattle Price Changes from 2014 to 2016
Source: Bloomberg
However, 2016 is expected to be different from 2015 since the
balance of feeder cattle has been stabilized. In 3Q 2016, Tyson
recorded a positive operating income in beef segment. Tyson has
announced its improved marketing strategy and branding plan for
beef. 41 One of its solutions to survive in beef market is Tyson
Taste Makers, a line of chef-inspired meal kits for home delivery
with Amazon Fresh service.42 This product includes uncooked
meat ingredients which are fresher and healthier. However, it
would not dramatically boost the profits in beef segment since e-
commerce for food market is in its early stage.
Chicken segment is the real cash cow to Tyson Foods. Even
though its sales are less than beef segment’s, its operation income
was $380 million in 3Q 2016 which accounts for about 50% of
the entire operation income of Tyson Foods. Chicken is the most
lucrative segment with 13.9% of operating margin. Tyson will
likely continue to make profits by focusing on chicken segment in
4Q 2016.
Prepared Food is a rising business segment in Tyson Foods. This
segment has accomplished a remarkable success with $588
million of operating income in 2015 compared to $60 million
losses in 2014. Tyson has successfully caught up the consumer
trend by expanding prepared product variations throughout
acquisitions. Prepared Food is expected to bring profits to Tyson
in 4Q 2016.
Tyson will face fierce competition in pork segment as more pork-
processing plants get built, including some funded by hog farmers
group.43 Tyson has invested in raising more hogs to stabilize the
supply. The operating margin had increased from 5.3% to 9.6% in
3Q 2016. The port segment is expected to grow more since its
high price and enhanced operating margin.
Competition
Tyson Foods has intense competition with other food producers
and processors. The competition among Tyson Foods and its
competitors are about the price, food quality, innovation, safety,
convenience, long term contract and brand identification.
Compared to other food producers and processors, Tyson Foods
has more advantages. For example, Tyson Foods is able to change
based on the consumer preferences and dietary habits successfully
develop and launch new products.
The major competitors of Tyson Foods are Pilgrim’s Pride
Corporation, Hormel Food, Sanderson Farms, Mondelez
International and ConAgra Food. In general, Tyson Foods is the
second best among these competitors from market capitalization.
The market capitalization of Tyson Foods is 28.03 billion, which
is only lower than Mondelez Intl but higher than other
competitors. In 2015, they have the highest revenue and gross
profit among these competitors. However, the profit margin and
operating margin are the second lowest, which means Tyson
Foods has relative low profitability. In addition, Tyson Foods
owned more stable labor contract and customer contract than
competitors. For example, Wal-Mart accounted for 16.8% of
Tyson sales in fiscal 2015. Except Wal-Mart, Tyson also has long
term contract with a lot of fast-food restaurant like, KFC, Taco
Bell, McDonald’s, Burger King. Tyson Foods also have a stable
supplier contract, for example, it has more than 6000 independent
contract farms to grow chickens.
0
50
100
150
200
250
300
11
Research and Development
Tyson Foods currently has 173 research and development team
members to work together for innovation, consumer product
analysis, fulfilling emerging consumer needs and planning the
future of packaging for protein as they are developed. With
100,000 square foot research and development facility and 19
research kitchens and a USDA-inspected pilot plant, Tyson Foods
can work better to improve product development, to automate
manual processes in our processing plants and grow out
operations, and improve chicken breeding stock.44
Catalyst for growth and change
Livestock disease
One major threat for the Tyson Foods is outbreak of a livestock
disease (such as avian influenza [AI] or bovine spongiform
encephalopathy [BSE]). In 2015, with the bird flu out broke,
Tyson Foods Inc., as the largest U.S. chicken producer, the stock
price fell the most in nine months after bird flu had been found
and reported. These diseases will not only decrease the consumer
confidence, but also destroy the brand image. Moreover,
decreasing of sales could lead the stock price to decline as well.
Health
Because the major products of Tyson Foods are chicken, beef and
pork, health is an important concern of consuming meat.
Continuing global concern about the wellness and health becomes
an important factor that influences Tyson’s sales. In addition, with
the increasing number of vegetarian and vegan customers, the
sales of meat may also decline. As we can see the following chart
about the red meat and poultry retailing, the consumption of red
meat which will cause a series of disease like cardiovascular
diseases and have high calories was decreased from 2006 to 2016.
Source: USDA, Economic Research Service
Emerging market
Emerging markets are both a challenge and opportunity for Tyson
Foods. It wants to open the market in China and India, but it is a
big challenge. In 2015, Tyson Foods finally sold meat production
operations in Mexico and Brazil to JBS. S.A.
Although Tyson Foods had loss in Brazil and Mexico market, it
has better performance in China by successfully understanding
the market. Demand for pork is the highest in China, and people
normally prefer to buy meat in the local market where sell freshly
butchered livestock rather than processed meat in a cooler. For
this reason, international companies have problems to penetrate
the Chinese market. Tyson Foods uses high technology that can
help people know where the livestock was slaughtered and when
the meat arrived in the store cooler.45 In China, a country with
many food safety problems, this action made people have more
confidence in Tyson Foods.
The problem in international market is that revenue is affected by
the currency exchange rate. To reduce the volatility of currency
problem in international market, Tyson Foods has bought
currency derivatives to hedge the foreign exchange risk.
Pending Lawsuit
Tyson Foods and other chicken producers are accused of the
chicken price fixation in October 8, 2016. Even though Tyson
Foods disputes the collusion, the lawsuit is highly convincing.
The graph above shows that the price had increased abnormally
from 2012 to 2013. It is highly likely that Tyson Foods had been
enjoying manipulated operating margin from chicken sector.
After the lawsuit was announced, the stock price was decreased to
$67.5 from $74.05.
Key investment positives and negatives Positives
The beta of Tyson Foods is 0.66, which means its
security is theoretically less volatile than the market. So
it helps decrease the portfolio standard deviation since it
is less affected by the market movement.
Tyson Foods hedges the commodity and interest risk by
entering long-term contract and buying derivatives.
Therefore, Tyson Foods can be a safe security in the
portfolio can give a steady profit.
The operating income has increased from 3Q 2015 to 3Q
2016. Tyson Foods shows the signs of recovery.
Negatives
The food products industry is relatively low profitable
and already in the mature stage, it is difficult to make a
huge profit by investing in Tyson Foods stock.
Its low beta can be a weakness when the market is in
strong performance.
Its debt rate is high compared to its competitors due to
acquisitions in 2014 and 2015. Even though it hedged
12
the interest risk by purchasing derivatives, Tyson has
still exposure to interest risk.
The lawsuit against Tyson Foods of chicken price
fixation decreased the stock price. The operating margin
for the chicken sector has been adjusted since it had been
increased abnormally since 2015. Also, the lawsuit is
highly likely against Tyson Foods which its sentence will
decrease the stock price again.
VALUATION ANALYSIS
Revenue
We decomposed Tyson’s revenue into four segments: chicken,
pork, beef and prepared food. Our revenue forecast is based on
the 10Q of the first three quarters in fiscal 2016 and economic
outlook. In order to predict 2016 revenue, we analyzed three 10Qs
of Tyson Foods. The sales volume had decreased in the previous
9 months due to the loss in Mexico and Brazil. Since Tyson Foods
doesn’t operate in Mexico and Brazil anymore, the sales volume
is expected to grow again in Q4 2016 and 2017.
Although total sales had been declined, the operating income had
been increased to enhanced operating margin. Operating income
had been increased from $563 in 3Q 2015 to $767 in 3Q 2016.
Even though we forecast the that the total revenue will be
decreased by 7.15% compared to the fiscal year of 2015, the
company is not in a bad shape in terms of operation.
Quarterly Total Sales Q1 Q2 Q3
2015 10,817 9,979 10,071
2016 9,152 9,170 9,403 Source: Tyson 10Q 2016
Quarterly Operating Income Q1 Q2 Q3
2015 509 547 563
2016 776 704 767 Source: Tyson 10Q 2016
As shown in the above tables, Tyson Foods had increased its
operating margin every quarter, so they had increased operating
income in fact. Therefore, we decided our target price based on
DCF model since it uses free cash flow generated by operating
income. Examining total revenue is not the right method to judge
the stock price of Tyson Foods.
Cost
Cost of goods sold The cost of goods sold in Tyson Foods showed a decline trend
since 2012, which had been decreased from 92.21% of sales to
88.45%. From 10Q of the third quarter, Tyson Foods reported that
the cost of goods sold was only 86.99% of sale in previous nine
months of fiscal 2016.
Overall, the operating margin has been enhanced in all four
business sectors but we have adjusted its COGS to 88% due to
pending lawsuit against chicken price fixation. The lawsuit is
highly likely against Tyson Foods so we have increased the
COGS.
Research and Development
According to the Q3 2016 Conference Call, Tyson Foods said it
is going to continue to invest heavily in innovation, new product
launches. We predict that the research and development cost of
Tyson will be increased every year. We forecast Tyson will spend
0.18% of sales in 2016 and 0.2% of sales in 2017 and will increase
0.02% of sale per year later.
Operating Income
We forecast the operating income of Tyson Foods will increase to
6.66% of sales by the end of fiscal 2016. Through the 10Q 2016
of Tyson, compared to last year, the operating margin increased
in each segment. In chicken segment, the operating margin of
previous 9 months in 2016 was13.4%, beef was 1.9%, pork was
11.4% and prepared food was 10.9%.
However, operating income of year 2017 is likely affected by the
pending lawsuit. Since the lawsuit is highly convincing, the
COGS is adjusted to be highly. Although other business sectors
show that their operating margin has been increased, chicken
sector still accounts for the largest proportion in operating income.
Debt
In 2014 that Tyson had an acquisition with Hillshire
Brands which made the sales of prepared food doubled in 2014
and 2015. However, it also created $7,535 million long term debt
in 2014 and $6,010 in 2015. Through the analysis of 10K of
Tyson, we saw that the most of debt in Tyson will be due later
2020. Therefore, we forecasted the long-term debt of Tyson will
still be a large amount. We calculated the long-term debt by
calculating the average rate of long term debt to total asset in
previous 2 years and then adjusted it by adding 3%.
Weighted Average Cost of Capital (WACC)
The weighted average cost of capital (WACC) estimation is
consisted of equity and debt in Tyson.
Cost of equity (Re)
We used the Capital Asset Pricing Model (CAPM) to estimate the
cost of equity. We used 30 Year Treasury Bond rate as risk free
rate, which was 2.93%. We used 7.93% as market rate of return.
For the Beta, in Bloomberg, we found the 1-year, 3-year and 5-
year beta for daily, weekly and monthly. Because daily returns are
often noisy and monthly returns are less volatile, we take monthly
returns as our choice and got 0.66 as our beta. Through the
calculation, we got the cost of equity is 6.23%, and the weight of
equity is 74.33%.
Cost of debt (Rd)
We used 30 years cooperate bond rate from FINRA as our pre-tax
cost of debt which was 4.31%. We used 41.9% as our marginal
tax rate, so we got the after-tax cost of debt is 2.47%. By adding
the operating leases, long-term debt and current portion of long-
13
term debt, we got total value of debt, which is $7,154 million and
the weighted of debt is 25.67%.
Through the calculation of weighted average cost of capital, we
estimated our WACC is 5.27%.
Discounted Cash Flow Model and
Economic Profits Model (DCF & EP)
In discounted cash flow model and economic profits model, we
calculated CV growth first and got 0.21%, since it was lower than
GDP, we used 2.1% which a little bit higher than GDP as our CV
growth. We take 2020 as our continuing value year. The
NOPLAT, Invested Capital and cost of equity are the major
factors influencing our share price, through these we got the CV
ROIC and WACC to calculate the free cash flow and economic
profit in 2020 CV.
Because of the acquisition in 2014, Tyson Foods had large amount
of debt in 2016 and future years we predict. After we got value of
operating asset, through adding value of non-operating asset and
reducing the value of debt, ESOP and other, we got the value of
equity and share price. The discounted cash flow and economic
profit model we have provide us the stock price of TSN will be
$62.24, and the adjusted price to 2 December 2016 is $62.63.
We have decided DCF model is the most accurate indicator for
Tyson Foods stock price since its calculation is based on the free
cash flow. Tyson is expected to generate more free cash flow since
its operating margin has been increased, although its total sales
had been declined. The stock price of Tyson Foods as of
12/2/2016 is $56.12 which is undervalued by 12% compared to
DCF model.
Dividend discounted model (DDM)
The intrinsic stock value of Tyson Foods provided by dividend
discount model is $63.29, and the adjusted price is $63.69. We got
P/E multiple, which is 19.85 through CV growth, CV ROE and
cost of equity. The EPS we used from the net income divided by
basic weighted average shares. Because we forecast that the net
income and shares outstanding will have a stable increasing, we
got a relative higher EPS, which was 3.89 in 2020. Tyson’s
dividend per share increased since 2011, which is 0.16 in 2011
and increased to 0.45 in 2015. We predict that the dividend would
continue to increase in next five years, which would be 0.6 in
2015, and increased 0.05 each year in future 5 years. Then we
used dividend discounted model to this the intrinsic value.
However, DDM model doesn’t provide any useful information
about Tyson Foods, since its dividend yield is too low. The current
dividend yield of Tyson Foods is 0.9% which is considerably low
compared to the food industry average dividend yield of 2.49%.46
Relative P/E Valuation
Since there are not enough direct competitors for a relative P/E
valuation, the industry has been expanded to the overall food
products industry. The 7 companies have been selected for the
valuation test and two companies have been deleted
P/E Valuation Candidates
Ticker
Company
Market Cap
(Billion)
CAG ConAgra Foods, Inc. 15.29
CPB
Campbell Soup
Company 16.45
GIS General Mills, Inc. 36.1
HRL Hormel 18.41
HSY The Hershey Company 20.73
K Kellogg Company 25.39
KHC Kraft Heinz Company 98.89
MKC McCormick Non Vtg 11.54
SAFM Sanderson Farms 1.89
Source: Yahoo Finance
Kraft Heinz company is deleted since its market cap is too larger
than other competitors. Sanderson Farms is also deleted since it
has the lowest market cap and the lowest P/E ratio. The target
prices of the P/E valuation for 2016 and 2017 are $80.58 and
$78.16 respectively. The prices are modestly different from the
forecasted price of DCF and EP models since this model expanded
its industry from the meat to overall food processing. Since the
meat industry has only few private companies to compare, we
determined this forecasted price of the P/E valuation is less
accurate than the DCF and EP calculation.
SENSITIVITY ANALYSIS
We included sensitivity analysis to find out the impact of changes
in two variables on the stock price. The four sensitivity tables
show the changes in two variables in each scenario below.
Marginal Tax Rate & Pre-Tax Cost of Debt
The industry average of Debt to Equity ratio in consumer
discretionary in 2015 was 0.1. The Debt to Equity ratio of Tyson
Foods in 2015 was .69 which is unusually high compared to
competitors. The company had aggressively expanded its
businesses by acquisitions in 2014 and 2015, so the pre-tax cost
of debt rate is an important variable to measure the stock price of
Tyson Foods. Another variable related to pre-tax cost of debt is
marginal tax rate. Since the new president promised a huge cut in
the corporate tax rate, this sensitivity analysis table shows how
the tax rate affects the stock price. The 3% decrease in the
marginal tax rate would increase the stock price by about $5
assuming Cost of Debt is constant.
Equity Risk Premium & Beta
Since Tyson Foods had increased its debt to acquire Hillshire
Brands, the company beta had been affected by its changed cost
structure. The goal of this analysis is to find out how much the
14
stock price can be affected by the changes in beta assumption and
the market which is equity risk premium.
Equity risk premium and beta are two main variables to show how
sensitive the stock price of Tyson Foods is to the market.
If the beta is decreased by .02, the stock price will be increased by
about $2 holding ERP constant. Likewise, if ERP is decreased by
2%, the stock price will be increased by about $3.
COGS/Sales Ratio & Continuing Value Growth
Rate
Since food processing industry is facing a low operating margin,
even a small decrease in COGS/sales help them survive in the
highly-saturated market. In 2015, Tyson Foods had invested its
capital to increase operating margin especially in beef and pork
sector. We forecasted its COGS/Sales will be 88% and did a
sensitivity analysis test to show how the stock price is changed by
the COGS/Sales ratio. Continuing Value Growth rate will help to
understand more about the free cash flow changed by the
COGS/Sales ratio since it is the major valuable to calculate CV of
Free Cash Flow. The 20-basis-point increase in CV Growth rate
will increase the stock price by about $3 holding the COGS/Sales
rate constant. Conversely, the 20-basis-point decrease in the
COGS/Sales rate will increase the stock price by about $4 holding
the CV Growth rate constant.
Continuing Value ROIC & WACC
The return on invested capital tells how efficient the company
uses its invested capital. Since Tyson Foods has increased its
invested capital in 2015, we did a sensitivity analysis test to show
how the CV ROIC rate affects the stock price. WACC is another
major variable to the DCF model calculation since the calculated
free cash flow is discounted by WACC. If the CV ROIC is
increased by 1%, the stock price will be increased by about $2
holding WACC constant. Conversely, if WACC is increased by
10-basis-point, the stock price will be decreased by about $3
assuming CV ROIC constant.
Important Disclaimer This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report was
originally created to offer an internal investment recommendation
for the University of Iowa Krause Fund and its advisory board.
The report also provides potential employers and other interested
parties an example of the students’ skills, knowledge and abilities.
Members of the Krause Fund are not registered investment
advisors, brokers or officially licensed financial professionals.
The investment advice contained in this report does not represent
an offer or solicitation to buy or sell any of the securities
mentioned. Unless otherwise noted, facts and figures included in
this report are from publicly available sources. This report is not
a complete compilation of data, and its accuracy is not guaranteed.
From time to time, the University of Iowa, its faculty, staff,
students, or the Krause Fund may hold a financial interest in the
companies mentioned in this report.
15
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28 Netadvantage
29 Tyson Foods. (2015). Annual report 2015. Retrieved from http://ir.tyson.com/investor-
relations/financial-reports/annual-reports/
30 McCracken, J., & Welch, D. (2014, June 9). Tyson Said to Win Hillshire Bidding, Beating Pilgrim's
Pride. Retrieved September 20, 2016, from http://www.bloomberg.com/news/articles/2014-06-
08/tyson-said-to-win-bidding-for-hillshire-beating-pilgrim-s-pride
31 Baertlein, L. (2014, July 29). Tyson to sell Mexico, Brazil poultry businesses to JBS. Retrieved
September 20, 2016, from http://www.reuters.com/article/us-tyson-foods-results-
idUSKBN0FX0UR20140729
32 Tyson Foods. (2015). Annual report 2015. Retrieved from http://ir.tyson.com/investor-
relations/financial-reports/annual-reports/
33 Pilgrim’s Pride (2015). Annual report 2015. Retrieved from
http://ir.pilgrims.com/sec.cfm?view=all, Sanderson Farms (2015). Annual report 2015. Retrieved from
http://ir.sandersonfarms.com/sec.cfm?view=all 34 Souza, K. (2014, December 30). Beef industry faces higher prices, lower margins and shrinking
demand - Talk Business & Politics. Retrieved September 20, 2016, from
http://talkbusiness.net/2014/12/beef-industry-faces-higher-prices-lower-margins-and-shrinking-
demand/
35 Nunes, K. (2016, May 10). Tyson Foods shifting into overdrive. Retrieved September 20, 2016,
from http://www.foodbusinessnews.net/articles/news_home/Financial-
Performance/2016/05/Tyson_Foods_shifting_into_over.aspx?ID={113B1435-0D2C-4DF6-9A46-
8393DCDE40AF
36 Jamerson, J. (2016, August 8). Tyson, Helped By Prepared Foods, Beats And Raises Outlook.
Retrieved September 20, 2016, from http://www.foxbusiness.com/markets/2016/08/08/tyson-
helped-by-prepared-foods-beats-and-raises-outlook.html
37 Thornton, G. (2016, May 13). The new Tyson Foods is built for growth. Retrieved September 20,
2016, from http://www.wattagnet.com/blogs/6-all-things-poultry/post/26935-the-new-tyson-
foods-is-built-for-growth
38 MCCARTHY, R. (2016, May 10). Tyson Foods, Amazon Fresh close to meal kit launch. Retrieved
September 20, 2016, from
http://www.meatpoultry.com/articles/news_home/Business/2016/05/Tyson_Foods_Amazon_Fre
sh_close.aspx?ID={83BC2C5D-8BB3-4A52-92C8-7C7FA74348C0}
39 Vault. (2016). TYSON FOODS, INC.|Company Profile|Vault.com. Retrieved September 20, 2016,
from http://www.vault.com/company-profiles/food-beverage/tyson-foods,-inc/company-
overview.aspx
40 Stormlake. (2016, September 08). Tyson profits soar to record level, Hillshire expected to
further help gains. Retrieved September 20, 2016, from
http://www.stormlakepilottribune.com/story/2337452.html
41 Singh, S. (2016, February 16). Tyson CEO Plans to Defend Meat-Market Share, Boost Innovation.
Retrieved September 20, 2016, from http://www.bloomberg.com/news/articles/2016-02-
17/tyson-ceo-plans-to-defend-meat-market-share-boost-innovation
42 Sun, L. (2016, May 11). Instant Analysis: Amazon.com Partners With Tyson Foods for Meal Kit
Delivery. Retrieved September 20, 2016, from
http://www.fool.com/investing/general/2016/05/11/instant-analysis-amazoncom-partners-with-
tyson-foo.aspx
16
43 Bunge, J. (2016, August 08). Tyson, Helped by Prepared Foods, Raises Outlook. Retrieved
September 20, 2016, from http://www.wsj.com/articles/tyson-helped-by-prepared-foods-raises-
outlook-1470660096
44 Research & Development. Tyson Foods. September 20, 2016, Retrieved from
http://www.tysonfoods.com/innovation/research-and-development
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Retrieved September 20, 2016, from http://www.bloomberg.com/news/articles/2016-03-
08/buying-chicken-with-a-smartphone-tyson-goes-high-tech-in-china
46 Dividend (2016). Dividend by Sectors. Retrieved from http://www.dividend.com/how-to-
invest/comparing-dividend-stock-sectors-by-yield/
Tyson FoodsWeighted Average Cost of Capital (WACC) Estimation
WACC = 5.27%EquityRisk Free Rate 2.93%Beta 0.66Equity Risk Premium 5%Stock Price 56.12$ Shares Outstanding (in Millions) 369Total Value of Equity (in Millions) 20,708$ Weight of Equity 74.33%Cost of Equity (Re) 6.23%
DebtOperating Leases 428$ Current Portion of Long Term Debt 715$ Long Term Debt 6,010$ Total Value of Debt 7,153$ Weight of Debt 25.67%Pre Tax Cost of Debt (Rd) 4.31%Marginal Tax Rate 41.90%
Value 27,862$
WACC = Re(E/V)+Rd(D/V)+Rpfd(PFD/V)
Tyson FoodsKey Assumptions of Valuation Model
Ticker Symbol TSN
Current Share Price $56.12
Current Model Date 12/2/2016Fiscal Year End Sep. 30
Pre-Tax Cost of Debt 4.31% Beta
Beta 0.66 Daily Weekly MonthlyRisk-Free Rate 2.93% 1 0.397 0.392 0.086Market rate of return 7.93% 3 0.696 0.656 0.386
Equity Risk Premium 5.00% 5 0.72 0.665 0.126
CV Growth of NOPLAT 2.10%
CV Growth of EPS 2.21%
CV Growth of ROIC 9.76%
Current Dividend Yield 0.87%Marginal Tax Rate 41.90%WACC 5.27%
Tyson FoodsSensitive Analysis
62.63$ 4.01% 4.11% 4.21% 4.31% 4.41% 4.51% 4.61%
32.90% 77.91 77.39 76.87 76.35 75.84 75.34 74.8435.90% 73.31 72.82 72.35 71.87 71.41 70.94 70.4838.90% 68.61 68.17 67.73 67.30 66.87 66.45 66.0341.90% 63.83 63.42 63.03 62.63 62.24 61.86 61.48
44.90% 58.94 58.58 58.22 57.87 57.51 57.17 56.8247.90% 53.96 53.64 53.32 53.00 52.68 52.37 52.0650.90% 48.88 48.59 48.31 48.03 47.75 47.47 47.19
62.63$ 0.60 0.62 0.64 0.66 0.68 0.70 0.72
4.40% 78.91 76.40 74.01 71.73 69.55 67.47 65.474.60% 75.52 73.07 70.73 68.50 66.37 64.33 62.384.80% 72.34 69.94 67.65 65.47 63.39 61.40 59.505.00% 69.36 67.01 64.77 62.63 60.60 58.65 56.795.20% 66.55 64.25 62.05 59.96 57.97 56.07 54.255.40% 63.90 61.64 59.50 57.45 55.50 53.64 51.865.60% 61.40 59.19 57.08 55.08 53.17 51.35 49.61
62.63$ 87.40% 87.60% 87.80% 88.00% 88.20% 88.40% 88.60%
1.50% 65.83 62.31 58.78 55.26 51.74 48.21 44.691.70% 68.53 64.84 61.14 57.44 53.75 50.05 46.351.90% 71.55 67.66 63.77 59.88 56.00 52.11 48.222.10% 74.95 70.84 66.74 62.63 58.53 54.42 50.322.30% 78.81 74.45 70.10 65.75 61.40 57.05 52.702.50% 83.22 78.59 73.95 69.32 64.69 60.06 55.422.70% 88.32 83.36 78.40 73.45 68.49 63.53 58.57
62.63$ 6.76% 7.76% 8.76% 9.76% 10.76% 11.76% 12.76%
4.97% 61.20 65.71 69.19 71.95 74.21 76.08 77.655.07% 58.28 62.62 65.97 68.64 70.81 72.61 74.125.17% 55.55 59.74 62.97 65.54 67.63 69.36 70.825.27% 53.00 57.04 60.15 62.63 64.65 66.32 67.735.37% 50.60 54.50 57.51 59.90 61.85 63.47 64.835.47% 48.35 52.12 55.02 57.34 59.22 60.78 62.105.57% 46.22 49.87 52.68 54.92 56.74 58.25 59.53
WACC
CV ROIC
COGS/Sales
Beta
Pre-Tax Cost of Debt
Tax Rate
Equity
Risk
Premium
CV Growth
Tyson FoodsRevenue DecompositionIn Millions of USD except Per Share
Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV
Revenue ($) 34,384 37,505 41,435 38,473 39,664 41,065 42,571 44,042 Beef 14,400 16,177 17,236 14,995 15,295 15,754 16,227 16,795 Chicken 10,988 11,116 11,390 11,048 11,269 11,607 11,956 12,314 Pork 5,408 6,304 5,262 4,999 5,149 5,355 5,623 5,904 Prepared Foods 3,322 3,927 7,822 7,431 7,951 8,349 8,766 9,029
Percent Change (YoY)
Revenue 3.29% 9.08% 10.48% -7.15% 3.10% 3.53% 3.67% 3.45% Beef 4.69% 12.34% 6.55% -13.00% 2.00% 3.00% 3.00% 3.50% Chicken -3.34% 1.16% 2.46% -3.00% 2.00% 3.00% 3.00% 3.00% Pork -1.85% 16.57% -16.53% -5.00% 3.00% 4.00% 5.00% 5.00% Prepared Foods 2.63% 18.21% 99.19% -5.00% 7.00% 5.00% 5.00% 3.00%
Sales Change (YoY)
Sales Change - Volume % -0.20% 2.40% 5.00% 1.40% 2.50% 3.20% 2.80% 3.00% Sales Change - Prices % 4.60% 6.90% 4.80% -8.43% 0.58% 0.32% 0.84% 0.44%
Tyson FoodsCash Flow StatementIn Millions of USD except Per Share
Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV
Cash Flow
Operating Activities
Net Income / Starting Line 918 872 1,216 1,198 1,213 1,232 1,223 1,228 Depreciation, Depletion & Amortization 519 530 711 675 717 779 860 964 Deferred Taxes & Investment Tax Credit (12) (105) 38 24 24 24 24 24 Noncontrolling interest 9 (1) (1) (2) 1 Changes in Working Capital
(Increase) decrease in Receivables (126) (93) 66 (46) (40) (47) (45) (67) (Increase) decrease in Inventories 15 (148) 220 121 (50) (48) 1 (63) (Increase) decrease in Accounts Payable (12) 202 (162) 201 63 66 45 373 (Increase) decrease in interest payable - 5 (23) (42) 15 25 26 38 (Increase) decrease in Other Assets/Liabilities (28) (115) 71 (8) 6 8 17 287
Net Operating Cash Flow 1,314 1,178 2,570 2,131 1,947 2,038 2,148 2,785
Investing Activities
Capital Expenditures (558) (632) (854) (966) (1,183) (1,397) (1,677) (1,998) Other, net 39 10 31 (9) (9) (9) (10) (10) Net Investing Cash Flow (643) (8,800) (270) (975) (1,192) (1,406) (1,686) (2,007)
Financing Activities
Proceeds from issuance of short-term debt 64 68 66 67 67 Proceeds from issuance of long-term debt 68 5,576 501 (312) 182 755 594 846 Other long-term liability (48) 33 38 41 40 Issuance of common stock 59 59 59 59 59 Repurchases of common stock (614) (295) (495) (408) (449) (494) (543) (597) Dividends (104) (104) (147) (218) (233) (247) (260) (272) Other, net 18 (23) 17 (7) (4) (8) (0) 8 Net Financing Cash Flow (632) 5,154 (124) (871) (344) 170 (42) 149
Net Change in Cash 74 -707 250 285 411 802 420 927 Beginning Cash Balance 1071 1145 438 688 973 1,384 2,186 2,606
Ending Cash Balance 1145 438 688 973 1,384 2,186 2,606 3,533
Tyson FoodsBalance SheetIn Millions of USD except Per Share
Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV
AssetCash, Cash Equivalents & STI 1,145 438 688 973 1,384 2,186 2,606 3,533 Accounts & Notes Receiv 1,497 1,684 1,620 1,666 1,706 1,753 1,797 1,864 Inventories 2,817 3,274 2,878 2,757 2,808 2,856 2,854 2,917 Other ST Assets 145 825 195 214 219 239 224 212 Total Current Assets 5,604 6,221 5,381 5,610 6,117 7,034 7,482 8,527
Property, Plant & Equip, Net 4,053 5,130 5,176 5,527 6,054 6,732 7,610 8,704 Property, Plant & Equip 9,202 10,381 10,816 11,782 12,965 14,362 16,038 18,036 Accumulated Depreciation 5,149 5,251 5,640 6,254 6,911 7,629 8,429 9,332
Goodwill 1,902 6,706 6,667 6,667 6,667 6,667 6,667 6,667 Intangible Assets 138 5,276 5,168 5,108 5,047 4,987 4,926 4,866 Other LT Assets 480 623 612 621 630 639 649 659 Total Noncurrent Assets 6,573 17,735 17,623 17,923 18,398 19,025 19,852 20,896 Total Assets 12,177 23,956 23,004 23,533 24,515 26,059 27,334 29,423
Liabilities
Accounts Payable 1,359 1,806 1,662 1,863 1,927 1,992 2,037 2,410 ST Debt & Current Portion of LT Debt 513 643 715 779 847 913 980 1,047 Accrued Payroll 419 490 478 436 451 476 502 540 Miscellaneous Current Liabilities 719 858 680 690 702 730 732 1,007 Total Current Liabilities 3,010 3,797 3,535 3,769 3,927 4,111 4,250 5,003
LT Debt 1,895 7,535 6,010 5,698 5,880 6,635 7,229 8,075 Other LT Liabilities 560 1,270 1,304 1,256 1,289 1,327 1,369 1,409 Deferred Tax Liabilities 479 2,450 2,449 2,473 2,497 2,521 2,545 2,570 Total Noncurrent Liabilities 2,934 11,255 9,763 9,427 9,665 10,483 11,143 12,054 Total Liabilities 5,944 15,052 13,298 13,195 13,592 14,594 15,394 17,057
Shareholders' Equity
Common Stock 2,331 4,299 4,349 4,408 4,466 4,525 4,584 4,643 Treasury Stock (1,021) (1,010) (1,381) (1,789) (2,238) (2,732) (3,275) (3,872) Retained Earnings 4,999 5,748 6,813 7,793 8,773 9,758 10,721 11,676 Other Equity (108) (147) (90) (97) (101) (109) (109) (101) Total Shareholder's Equity 6,201 8,890 9,691 10,314 10,900 11,443 11,921 12,345 Accumulated Minority Interest 32 14 15 24 23 22 19 21 Total Equity 6,233 8,904 9,706 10,338 10,923 11,464 11,940 12,366 Total Liabilities & Equity 12,177 23,956 23,004 23,533 24,515 26,059 27,334 29,423
Tyson FoodsIncome StatementIn Millions of USD except Per Share
Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV
Revenue 34,384 37,505 41,435 38,473 39,664 41,065 42,571 44,042
COGS 31,468 34,131 36,648 33,857 34,905 36,137 37,462 38,757
Depreciation 474 494 609 614 656 719 799 903
Amortization of Intangibles 45 36 102 60 60 60 60 60
Gross Income 2,397 2,844 4,076 3,942 4,043 4,149 4,249 4,321
SG&A Expense 933 1,203 1,738 1,616 1,654 1,698 1,745 1,792
Research & Development 50 52 75 70 80 91 103 115
EBIT (Operating Income) 1,414 1,589 2,338 2,256 2,310 2,360 2,401 2,414
Nonoperating Income - Net 20 10 203 93 66 52 - -
Interest Expense 145 132 293 287 288 292 297 301
Unusual Expense - Net 32 215 327 - - - - -
Pretax Income 1,257 1,252 1,921 2,062 2,088 2,120 2,104 2,113
Income Taxes 409 396 697 864 875 888 882 885
Consolidated Net Income 848 856 1,224 1,198 1,213 1,232 1,223 1,228
Minority Interest - (8) 4 - - - - -
Net Income 848 864 1,220 1,198 1,213 1,232 1,223 1,228
Total Shares Outstanding 344 376 369 364 358 353 347 340
Basic Weighted Avg Shares 352 360 373 366 361 355 350 343
Basic EPS 2.21 2.48 3.01 3.27 3.36 3.47 3.50 3.57
Dividends per Share 0.23 0.33 0.45 0.60 0.65 0.70 0.75 0.80
Tyson FoodsCommon Size Income Statement(Total Sales Basis)Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV
Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%COGS 91.52% 91.00% 88.45% 88.00% 88.00% 88.00% 88.00% 88.00%Depreciation 1.38% 1.32% 1.47% 1.60% 1.65% 1.75% 1.88% 2.05%Amortization of Intangibles 0.13% 0.10% 0.25% 0.16% 0.15% 0.15% 0.14% 0.14%
Gross Income 6.97% 7.58% 9.84% 10.25% 10.19% 10.10% 9.98% 9.81%Selling, General & Admin 2.71% 3.21% 4.19% 4.20% 4.17% 4.13% 4.10% 4.07%Research & Development 0.15% 0.14% 0.18% 0.18% 0.20% 0.22% 0.24% 0.26%
EBIT (Operating Income) 4.11% 4.24% 5.64% 5.86% 5.82% 5.75% 5.64% 5.48%Nonoperating Income - Net 0.06% 0.03% 0.49% 0.24% 0.17% 0.13% 0.00% 0.00%Interest Expense - Net 0.42% 0.35% 0.71% 0.75% 0.73% 0.71% 0.70% 0.68%Other Non-Op (Income) Loss 0.09% 0.57% 0.79% 0.00% 0.00% 0.00% 0.00% 0.00%
Pretax Income 3.66% 3.34% 4.64% 5.36% 5.26% 5.16% 4.94% 4.80%Income Taxes 1.19% 1.06% 1.68% 2.25% 2.21% 2.16% 2.07% 2.01%Consolidated Net Income 2.47% 2.28% 2.95% 3.11% 3.06% 3.00% 2.87% 2.79%Minority Interest 0.00% -0.02% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00%Net Income 2.47% 2.30% 2.94% 3.11% 3.06% 3.00% 2.87% 2.79%
Tyson FoodsCommon Size Balance Sheet(Total Sales Basis)Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV
AssetCash, Cash Equivalents & STI 3.33% 1.17% 1.66% 2.53% 3.49% 5.32% 6.12% 8.02%Accounts Receivables, Net 4.35% 4.49% 3.91% 4.33% 4.30% 4.27% 4.22% 4.23%Inventories 8.19% 8.73% 6.95% 7.17% 7.08% 6.95% 6.70% 6.62%Other Current Assests 0.42% 2.20% 0.47% 0.56% 0.55% 0.58% 0.53% 0.48%
Total Current Assets 16.30% 16.59% 12.99% 14.58% 15.42% 17.13% 17.58% 19.36%Property, Plant & Equip, Net 11.79% 13.68% 12.49% 14.37% 15.26% 16.39% 17.88% 19.76%Property, Plant & Equip 26.76% 27.68% 26.10% 30.62% 32.69% 34.97% 37.67% 40.95%Accumulated Depreciation 14.97% 14.00% 13.61% 16.26% 17.42% 18.58% 19.80% 21.19%Other LT Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Noncurrent Assets 19.12% 47.29% 42.53% 46.59% 46.38% 46.33% 46.63% 47.45%Total Assets 35.41% 63.87% 55.52% 61.17% 61.81% 63.46% 64.21% 66.81%Liabilities
Payables & Accruals 3.95% 4.82% 4.01% 4.84% 4.86% 4.85% 4.79% 5.47%ST Debt 1.49% 1.71% 1.73% 2.02% 2.14% 2.22% 2.30% 2.38%Accrued Payroll 1.22% 1.31% 1.15% 1.13% 1.14% 1.16% 1.18% 1.23%Miscellaneous Current Liabilities 2.28% 2.51% 1.86% 2.04% 2.01% 2.02% 1.95% 2.60%
Total Current Liabilities 8.75% 10.12% 8.53% 9.80% 9.90% 10.01% 9.98% 11.36%LT Debt 5.51% 20.09% 14.50% 14.81% 14.82% 16.16% 16.98% 18.34%Pension Liabilities 0.46% 1.42% 0.23% 0.00% 0.00% 0.00% 0.00% 0.00%Deferred Tax Liabilities 1.39% 6.53% 5.91% 6.43% 6.29% 6.14% 5.98% 5.83%Misc LT Liabilities 1.17% 1.97% 2.92% 3.15% 0.00% 0.00% 0.00% 0.00%
Total Noncurrent Liabilities 8.53% 30.01% 23.56% 24.50% 24.37% 25.53% 26.18% 27.37%Total Liabilities 17.29% 40.13% 32.09% 34.30% 34.27% 35.54% 36.16% 38.73%Equity
Common Stock 6.78% 11.46% 10.50% 11.46% 11.26% 11.02% 10.77% 10.54%Treasury Stock -2.97% -2.69% -3.33% -4.65% -5.64% -6.65% -7.69% -8.79%Retained Earnings 14.54% 15.33% 16.44% 20.25% 22.12% 23.76% 25.18% 26.51%Other Equity -0.31% -0.39% -0.22% -0.25% -0.25% -0.26% -0.26% -0.23%
Total Shareholder's Equity 18.03% 23.70% 23.39% 26.81% 27.48% 27.87% 28.00% 28.03%Accumulated Minority Interest 0.09% 0.04% 0.04% 0.06% 0.06% 0.05% 0.05% 0.05%
Total Equity 18.13% 23.74% 23.42% 26.87% 27.54% 27.92% 28.05% 28.08%Total Liabilities & Equity 35.41% 63.87% 55.52% 61.17% 61.81% 63.46% 64.21% 66.81%
Tyson FoodsValue Driver EstimationIn Millions of USD except Per Share
Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV
Operating Revenues 34,384 37,505 41,435 38,473 39,664 41,065 42,571 44,042 COGS 31,468 34,131 36,648 33,857 34,905 36,137 37,462 38,757 SG + A 933 1,203 1,738 1,616 1,654 1,698 1,745 1,792 Depreciation 474 494 609 614 656 719 799 903 Amortization of Intangible 45 36 102 60 60 60 60 60 RD 50 52 75 70 80 91 103 115 Implied Interest on Leases 12 12 15 18 18 20 22 25 EBITA 1,426 1,601 2,278 2,275 2,328 2,380 2,423 2,439
Income Tax Expense 409 396 697 864 875 888 882 885 + Tax Sheild on Int Expense 61 55 123 120 121 122 124 126 + Tax Shield on Implied Lease Interest 5 5 6 8 7 8 9 10 + Tax Shield on Unusual Expense 13 90 137 - - - - - - Tax on Non-Operating Income 8 4 85 39 28 22 - - Total adjusted taxes 480 542 878 953 975 997 1,015 1,022
Deferred Taxes (79) 1,971 (1) 24 24 24 24 24
NOPLAT 867 3,030 1,399 1,345 1,376 1,407 1,432 1,441
Normal cash 172 188 207 973 198 205 213 220 Accounts Receivable, Net 1,497 1,684 1,620 1,666 1,706 1,753 1,797 1,864 Inventories 2,817 3,274 2,878 2,757 2,808 2,856 2,854 2,917 Operating Current Assets 4,486 5,146 4,705 5,397 4,712 4,814 4,865 5,002 Accounts payable 1,359 1,806 1,662 1,863 1,927 1,992 2,037 2,410 Accrued Payroll 419 490 478 436 451 476 502 540 Non Interest-Bearing Current Liabilities 1,778 2,296 2,140 2,300 2,378 2,468 2,539 2,950 Gross PPE 9,202 10,381 10,816 11,782 12,965 14,362 16,038 18,036 Accumulated Depreciation 5,149 5,251 5,640 6,254 6,911 7,629 8,429 9,332 Net Property, Plant, and Equipment 4,053 5,130 5,176 5,527 6,054 6,732 7,610 8,704 Net Intangible Assets (non-goodwill) 138 5,276 5,168 5,108 5,047 4,987 4,926 4,866 Capitalized PV of Operating Leases 289 359 428 467 514 569 635 714 Net Other Operating Assets 427 5,635 5,596 5,574 5,561 5,556 5,562 5,580 Deferred revenue (long-term) 719 858 680 690 702 730 732 1,007 Other Operating Liabilities 719 858 680 690 702 730 732 1,007
Invested Capital 6,469 12,757 12,658 13,509 13,247 13,904 14,766 15,330
NOPLAT 867 3,030 1,399 1,345 1,376 1,407 1,432 1,441 Beg. Invested Capital 6,330 6,469 12,757 12,658 13,509 13,247 13,904 14,766 ROIC 13.70% 46.84% 10.97% 10.63% 10.19% 10.62% 10.30% 9.76%
NOPLAT 867 3,030 1,399 1,345 1,376 1,407 1,432 1,441 Change in Invested Capital 138 6,288 (99) 851 (261) 656 862 564 FCF 729 (3,258) 1,499 494 1,638 751 570 877
Beg. Invested Capital 6,330 6,469 12,757 12,658 13,509 13,247 13,904 14,766 ROIC-WACC 8.43% 41.57% 5.70% 5.36% 4.92% 5.35% 5.02% 4.49%EP 534 2,689 727 678 664 708 699 663
Tyson FoodsDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV Growth 2.10% CV ROIC 9.76% WACC 5.27% Cost of Equity 6.23%NOPLAT CV 1,441
DCF Model EP ModelFiscal Years Ending Sep. 30 2016E 2017E 2018E 2019E 2020CV Fiscal Years Ending Sep. 30 2016E 2017E 2018E 2019E 2020CV
Free Cash Flow 494.30 1,637.70 750.53 570.03 877.05 NOPLAT 1345 1376 1407 1432 1441Free Cash Flow Continuing Value 35,648.22 BEG IC 12658 13509 13247 13904 14766
Periods to Discount 1 2 3 4 4 EP 678 664 708 699 663Discount Factor 1.05 1.11 1.17 1.23 1.23 CV 20883
469.54 1477.74 643.30 464.11 29024.41 Periods to Discount 1 2 3 4 4Value of Operating assets 32,079.10 Discount Factor 1.05 1.11 1.17 1.23 1.23
V(Non-operating ) PV of EP 643.95 599.20 607.17 568.76 17002.45 Minority interest 15.00 VALUE OF OPERATING ASSET 32079.10
Other assets 612.00 V(Non-operating ) Other current asset 195.00 Minority interest 15.00
Other assets 612.00 V(debt) Other current asset 195.00
Short Term Debt 715.00 Long-Term Debt 6,010.00 V(debt)
Short Term Debt 715.00 V(other) Long-Term Debt 6,010.00
PV of Operating Leases 428.39 Other Current Liabilities 680.00 V(other)Other Liabilities 1,304.00 PV of Operating Leases 428.39 ESOP 460.73 Other Current Liabilities 680.00 Minority interest Liability 15.00 Other Liabilities 1,304.00 Underfunded post returement liabilities 114.00 ESOP 460.73 Underfunded pension liabilities 209.00 Minority interest Liability 15.00
Underfunded post returement liabilities 114.00 Value of Equity 22,964.97 Underfunded pension liabilities 209.00 Share outstanding 369 Share price (9-30-15) 62.24$ Value of Equity 22,964.97 Adjusted Price (11-13-16) 62.63$ Share outstanding 369
Share price (9-30-15) 62.24$ Adjusted Price (11-13-16) 62.63$
Tyson FoodsDividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Sep. 30 2016E 2017E 2018E 2019E 2020CV
EPS 3.27$ 3.36$ 3.47$ 3.50$ 3.57$
Key Assumptions CV growth 2.10% CV ROE 9.94% Cost of Equity 6.23%
Future Cash Flows P/E Multiple (CV Year) 19.10 EPS (CV Year) 3.57$ Future Stock Price 68.27$ Dividends Per Share Future Cash Flows
Divdends Per Share 0.60 0.65 0.70 0.75CV 68.27Discount period 1 2 3 4 4Discount factor 1.06 1.13 1.20 1.27 1.27Discounted cash flow 0.56$ 0.58$ 0.58$ 0.59$ 53.61$
Intrinsic Value (9-30-15) 55.92$ Adjusted Price (11-13-16) 56.28$
Tyson FoodsRelative Valuation Models
EPS EPSTicker Company Price 2016E 2017E P/E 16 P/E 17
CAG ConAgra Foods, Inc. $34.93 $1.63 $1.67 21.4 20.9 15.29
CPB Campbell Soup Company $53.50 $2.94 $3.05 18.2 17.5 16.45
GIS General Mills, Inc. $61.04 $2.92 $3.09 20.9 19.8 36.1
HRL Hormel $38.03 $1.63 $1.67 23.3 22.8 18.41
HSY The Hershey Company $97.25 $4.31 $4.64 22.6 21.0 20.73
K Kellogg Company $72.50 $3.68 $3.99 19.7 18.2 25.39
KHC Kraft Heinz Company $81.21 $3.28 $3.92 24.8 20.7 98.89
MKC McCormick Non Vtg $91.52 $3.78 $4.12 24.2 22.2 11.54SAFM Sanderson Farms $86.59 $7.37 $8.33 11.7 10.4 1.89
Average 21.5 20.3
TSN Tyson Foods $56.12 3.27 3.36 17.2 16.7 24.25
Implied Value:
Relative P/E (EPS16) $ 70.22
Relative P/E (EPS17) 68.32$
Market Cap
(Billion)
Tyson FoodsKey Management RatiosFiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV
Liquidity RatiosWorking Capital Current Assets - Current Liabilities 2,573 2,594 2,424 1,846 1,842 2,191 2,923 3,232
Current Ratio Current Assets/Current Liabilities 1.91 1.86 1.64 1.52 1.49 1.56 1.71 1.76
Cash Ratio (Cash & Cash Equivalents)/Current Liabilities 0.38 0.12 0.19 0.26 0.35 0.53 0.61 0.71
Activity or Asset-Management RatiosTotal Asset Turnover Sales/Total Assets 2.82 1.57 1.80 1.63 1.62 1.58 1.56 1.50
Inventory Turnover COGS/Average Inventory 11.19 11.21 11.91 12.02 12.54 12.76 13.12 13.43
Inventory Period 365/Inventory Turnover 32.63 32.57 30.64 30.38 29.10 28.60 27.82 27.18
Financial Leverage RatiosDebt Ratio Total Debt/Total Assets 19.77% 34.14% 29.23% 27.52% 27.44% 28.96% 30.03% 31.00%
Debt to Equity Total Debt/Total Equity 38.63% 91.85% 69.29% 62.65% 61.58% 65.84% 68.75% 73.76%
Interest Coverage EBIT/Interest Charges 9.75 12.04 7.98 7.86 8.03 8.08 8.10 8.01
Profitability RatiosNet Profit on Sales (Sales - COGS)/Sales 2.47% 2.30% 2.94% 3.11% 3.06% 3.00% 2.87% 2.79%
Gross Profit Margin Gross Profit/Sales 6.97% 7.58% 9.84% 10.25% 10.19% 10.10% 9.98% 9.81%
ROA Net Income/Total Assets 8.25% 5.51% 6.44% 6.38% 6.25% 6.03% 5.69% 5.39%
ROE Net Income/Shareholder Equity 7.05% 4.78% 5.20% 5.15% 5.05% 4.87% 4.58% 4.33%
Payout Policy RatiosDividend Payout Dividends per Share/Earnings per Share 10.18% 13.10% 14.94% 18.35% 19.34% 20.20% 21.45% 22.38%
Total Payout Ratio (Dividends + Repurchases)/Net Income 0.62 0.13 0.44 0.52 0.56 0.60 0.66 0.71
Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)
Operating Operating Operating OperatingFiscal Years Ending Sep. 30 Leases Fiscal Years Ending Sep. 30 Leases Fiscal Years Ending Leases Fiscal Years Ending 77.3850368598279 Leases
2016 125 2015 107 2014 97 2013 1012017 98 2016 80 2015 69 2014 722018 72 2017 56 2016 46 2015 472019 48 2018 39 2017 27 2016 322020 39 2019 30 2018 16 2017 21Thereafter 111 Thereafter 104 Thereafter 78 Thereafter 55Total Minimum Payments 493 Total Minimum Payments 416 Total Minimum Payments 333 Total Minimum Payments 328Less: Interest 65 Less: Interest 57 Less: Interest 44 Less: Interest 38PV of Minimum Payments 428 PV of Minimum Payments 359 PV of Minimum Payments 289 PV of Minimum Payments 290
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 4.31% Pre-Tax Cost of Debt 4.31% Pre-Tax Cost of Debt 4.31% Pre-Tax Cost of Debt 4.31%Number Years Implied by Year 6 Payment 2.8 Number Years Implied by Year 6 Payment 3.5 Number Years Implied by Year 6 Payment 4.9 Number Years Implied by Year 6 Payment 2.6
Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 125 119.8 1 107 102.6 1 97 93.0 1 101 96.82 98 90.1 2 80 73.5 2 69 63.4 2 72 66.23 72 63.4 3 56 49.3 3 46 40.5 3 47 41.44 48 40.5 4 39 32.9 4 27 22.8 4 32 27.05 39 31.6 5 30 24.3 5 16 13.0 5 21 17.06 & beyond 39 82.9 6 & beyond 30 76.7 6 & beyond 16 55.9 6 & beyond 21 41.3PV of Minimum Payments 428.4 PV of Minimum Payments 359.4 PV of Minimum Payments 288.6 PV of Minimum Payments 289.7
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 14,735,065Average Time to Maturity (years): 7.10Expected Annual Number of Options Exercised: 2,075,361
Current Average Strike Price: 28.30$ Cost of Equity: 6.23%Current Stock Price: $56.12
2016E 2017E 2018E 2019E 2020CV
Increase in Shares Outstanding: 2,075,361 2,075,361 2,075,361 2,075,361 2,075,361Average Strike Price: 28.30$ 28.30$ 28.30$ 28.30$ 28.30$ Increase in Common Stock Account: 58,732,724 58,732,724 58,732,724 58,732,724 58,732,724
Change in Treasury Stock -408,100,000 -448,910,000 -493,801,000 -543,181,100 -597,499,210Expected Price of Repurchased Shares: 56.12$ 59.62$ 63.33$ 67.28$ 71.47$ Number of Shares Repurchased: (7,271,917) (7,529,991) (7,797,223) (8,073,939) (8,360,475)
Shares Outstanding (beginning of the year) 369,000,000 363,803,444 358,348,815 352,626,953 346,628,376Plus: Shares Issued Through ESOP 2,075,361 2,075,361 2,075,361 2,075,361 2,075,361Less: Shares Repurchased in Treasury (7,271,917) (7,529,991) (7,797,223) (8,073,939) (8,360,475) Shares Outstanding (end of the year) 363,803,444 358,348,815 352,626,953 346,628,376 340,343,262
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol TSNCurrent Stock Price $56.12Risk Free Rate 2.93%Current Dividend Yield 0.87%Annualized St. Dev. of Stock Returns 27.10%
Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price Granted
Range 1 14,735,065 28.30 7.10 31.27$ 460,731,167$
Total 14,735,065 28.30$ 7.10 34.41$ 460,731,167$