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WIKI ANALYSIS
Tyson Foods, Inc. is (NYSE:TSN) the world's largest processor and marketer of chicken, beef and pork products, exporting to over 80 countries. The firm generated $26.9 billion in 2008 revenue, operating five business segments: Chicken; Beef (its largest segment); Pork; Prepared Foods; and Other. Tyson sells to a variety of customers, including retail, food service and even pharmaceutical companies. Wal-Mart Stores (WMT) is the company's largest customer, accounting for 12.5% of overall sales. In 2007, Tyson got into the biodiesel business by striking a partnership with oil company ConocoPhillips (COP) to produce biodiesel from animal fat, which at its peak could reach 175 million gallons per year for Tyson.
Company Overview
Company History
Headquartered in Springdale, Arkansas, Tyson Foods entered the meat processing industry in 1935. Since then, the company has become the world's largest processor and marketer of chicken, beef and pork products mostly through a long history of acquisitions, its most recent being the acquisition of IBP, Inc.--now called Tyson Fresh Meats, Inc. (TFM)--in 2001. The company is also the second largest publicly traded food company in the Fortune 500, as measured by revenue, and employs 107,000 worldwide. In fiscal 2007, Tyson Foods exported to more than 80 countries, including Canada, Central America, China, the European Union, Japan, Mexico, Russia, South Korea and Taiwan.
Quarterly Earnings
Q2 2009
In the second quarter of 2009, Tyson posted revenues of $6.3 billion, virtually even with Q2 2008 figures; net income fell to a $104 million loss.[1] Although the revenue fell $283 million due to lower prices across the chicken and pork segments, it was buoyed by a volume increase of $254 million.[2] Net income fell predominantly as a result of losses grain and energy hedges, totaling $65 million in the quarter.[3] The company has worked through the majority of the grain hedges related to its chicken segment and expects the segment to gradually recover during the year.[2]
Q3 2009
In the third quarter of 2009, Tyson posted revenues of $6.67 billion, a 3% decrease from year prior figures; net income rose $125 million to $134 million.[4] Tyson's chicken segment reached profitability this quarter, earning $143 million as pricing recovered from the previous year's oversupply. Lower supply was principally due to Tyson's reduction in breeding stock, lowering chicken inventory by $250 million from the previous year.[5] These also benefited input costs as chicken feed costs were reduced by $91 million in the quarter.[6] Overall, chicken operating margin increased from -1.3% to 5.9% over the year.[7] The pork and beef segments didn't fare as well. The beef segment was hampered by lower prices and volume, a result of the trade down effect as consumers looked to decrease grocery costs through purchasing lower priced alternatives. The pork segment was also harmed by lower pricing and volume brought on by swine flu fears.[4] Although net pricing decreased by 5.6% during the quarter, revenues were buoyed by a 3.1% increase in volume.[8] Tyson expects lower input costs in the coming quarters as the company's older, higher cost Commodities hedges run out and more recent, lower pricing is realized.
Q4 2009
In the fourth quarter of 2009, Tyson posted revenues of $6.62 billion, a decrease of 2.7% from Q4 2008; net income grew from $9 million $134 million. Operating income increased more than 500% from $45 million to $276 million.[9] Despite increases in volume for Chicken and Beef sales (worth $200 million), lower average sale prices for Beef and Pork (totaling $387 million) led to the decline in total revenues.[10] The Chicken segment was the strongest for the quarter, increasing operating income $173 million compared to last year. Beef and Prepared Foods also improved their operating income by $57 million and $31 million, respectively, as a result of improved production efficiency and lower raw material costs for prepared foods. Weak demand for Pork offset lower live hog costs, leading to a decrease for Pork's operating income of $29 million.[11]
Q1 2010
In the first quarter of 2010,Tyson generated revenues of $6.64 million, an increase of 1.7%; net income grew to $159 million from a loss of $104 million in Q1 2009. Operating income increased to $314 million from a loss of $198 in the previous year.[12] Sales volume for the quarter increased 4.6% as chicken and beef sales increased; the volume increase accounted for approximately $318 million. The increase in volume however was offset by a 2.7% decrease in average sales price, which decreased revenues by $204 million. [13] Chicken's strong performance was due primarily to a recent international acquisition that increased overall sales and to lower production costs, such as a decrease in the price of grain worth $84 million.[14] Beef sales prices dropped 6.1% during the quarter, but this decrease was more than offset by a 7.2% increase in volume. Both Pork and Processed Foods saw decreased revenues in the quarter as a result of both lower volume and sales prices for the former, and lower average sales price for the latter.[15] On the same day as the earnings report, China announced anti-dumping measures on US chicken producers after finding that American firms are hurting China's domestic chicken producers. Duties charged range up to 105.4% but Tyson is subject to the lowest duty of 43.1%.[16]
Segments
Chicken
In fiscal 2007, the chicken segment generated $8.1 billion in sales. This business focuses primarily around the processing of live chickens into fresh, frozen and value-added chicken products. Unlike it does with its other segments, Tyson does not purchase live chickens for its chicken segment, instead raising animals itself. This is because there does not exist an active market for live chicken; the animals are not traded on commodities exchanges as do cattle or hogs. Corn and soybean meal are major production costs in the poultry industry, representing roughly 37% of the cost of growing a live chicken. In 2008, the cost of grain increased by $600 million and total chicken segment inputs increased by $900 million.[17] The chicken segment’s operating results have also been affected negatively by higher energy costs and lower prices due to oversupply in the world chicken market. Tyson has started to address these issues by decreasing its breeding stock. Between 2008 and 2009, the company decreased its chicken inventories by more than 30%. Besides decreasing supply, and thereby raising prices, this strategy has the added benefit of decreasing total feed costs. As a result, this segment returned to profitability in the third quarter of 2009.[4]
Beef
Tyson's beef operations are the company's largest accounting for almost half of revenues. In fiscal 2007, the beef segment contributed the largest portion of Tyson's revenue, generating $12.7 billion in sales (48% of overall sales). This segment focuses primarily on processing live fed cattle and fabricating dressed beef carcasses into primal and sub-primal meat cuts and case-ready products. Tyson differentiates itself from other beef producers in Brazil and China by feeding its cattle grain, as opposed to grass. Although grain fed cattle is more expensive to produce, it is also of higher quality and can be sold at a higher margin. [18] It also involves deriving value from allied products such as hides and variety meats for sale to further processors and others. In addition to selling to food-providers, Tyson also sells its allied beef products to pharmaceutical and technical products manufacturers. Tyson's beef operations ran into trouble in 2008 as the company made losses on its cattle hedges. However, the segment seems to be recovering in 2009 as cattle prices have fallen and become less volatile.[19]
Pork
In fiscal 2007, the pork segment generated $3.3 billion in sales. This segment processes live market hogs and fabricates pork carcasses into primal and sub-primal meat cuts and case-ready products. Like its beef segment, Tyson also sells its allied pork products to pharmaceutical and technical products manufacturers, as well as live swine to pork producers. After the swine flu outbreak of early 2009, the pork segment ran into trouble as several countries banned pork imports from the United States. This has lead to a mismatch of supply and demand, lowering profit margins and resulting in a decision to reduce the company's breeding stock by 28% by the end of 2009.[19]
Prepared Foods
In fiscal 2007, the prepared foods segment was the company's smallest sales contributor, generating $2.7 billion in sales. This segment manufactures and markets frozen and refrigerated food products, including pepperoni, beef and pork pizza toppings, pizza crusts, flour and corn tortilla products, appetizers, prepared meals, ethnic foods, soups, sauces, side dishes, meat dishes and processed meats. In fiscal 2007, prepared foods sales dropped another 1% after falling 3.9% from 2005 due to plant closing costs and lower average sales prices.
Biofuel
In 2007, Tyson created a partnership with oil company ConocoPhillips (COP) to produce biodiesel from animal fat. ConocoPhillips, the third-largest U.S. oil company, said it plans to spend about $100 million over a 3 to 5 year period to prepare several refineries to process the fuel. Tyson said production is expected to start late in 2007 and ramp up through spring 2009. At full production--estimated at 175 million gallons per year of biodiesel--Tyson expects annual earnings of 4 cents to 16 cents a share from the project.
Customers
The company's products are marketed and sold to national and regional grocery retailers, regional grocery wholesalers, meat distributors, clubs and warehouse stores, military commissaries, industrial food processing companies, national and regional chain restaurants or their distributors, international export companies and domestic distributors who service restaurants, food service operations such as plant and school cafeterias, convenience stores, hospitals and other vendors.
Tyson Foods' #1 customer is Wal-Mart Stores (WMT), which accounted for approximately 12.5% of the Company’s fiscal 2006 consolidated sales. No other single customer or customer group represented greater than 10% of fiscal 2006 consolidated sales. Tyson sells 36% of its products through food service channels and nearly half to supermarkets.
Trends & Forces
Availability & Price of Raw Materials
Tyson Foods' operating costs are dramatically affected by the price of raw materials, such as seed grains, live cattle, live swine and ingredients. Corn and soybean meal are major production costs in the poultry industry, representing roughly 37% of the cost of growing a chicken. Commodity cost inflation continues to weigh on Tyson's earnings; in fiscal 2008, the company's grain costs for its chicken segment increased by $600 million dollars.[20] Most of the cattle and swine Tyson processes are purchased from independent producers. A rise in the price of grain, swine, or cattle will cause a drop in earnings, and vice versa. The production of feed ingredients is affected by, among other things, weather patterns throughout the world (including hurricanes, the global level of supply inventories and demand for grains and other feed ingredients, as well as the agricultural policies of the U.S. and foreign governments.
Product Pricing
With each of its products, Tyson Foods must use supply and demand analysis to find the appropriate price that will optimize sales. A variety of other factors can shift the price of the company's products, including product safety and quality, brand identification (marketing), breadth and depth of product offering, customer service and credit terms. Tyson's beef and pork segments must price their products in line with the movements of cattle and pork spot and futures prices on commodities exchanges. Any divergence between Tyson's pricing and spot and futures prices would result in competitors such as Sanderson Farms (SAFM) or Cargill undercutting Tyson. Prepared Foods' prices are therefore much less volatile as competitors cannot quickly begin producing similar value-added products. As this segment represents only a small fraction of Tyson's overall sales, the company is dependent on high cattle and pork prices to grow revenues.
Tyson is Susceptible to Livestock Disease Outbreaks
Any disease outbreak in Tyson's chickens, cattle, or swine will decrease the demand for the company's products and detriment the company's earnings. Furthermore, an outbreak of disease could result in governmental restrictions on the import and export of Tyson's fresh chicken, beef or other products to or from its suppliers, facilities or customers. This could also result in negative publicity that may have an adverse effect on the company's ability to market its products successfully. The company is trying to mitigate this risk by diversifying its livestock production base internationally. By expanding its production facilities to new markets like China, India, and South America, Tyson will be able to continue production during a major disease outbreak.[21]
Energy Costs
Rising oil prices increase distribution and processing costs and have a negative impact on overall financial performance. Tyson hopes to mitigate these concerns by developing biodiesel from leftover animal fats with petroleum company ConocoPhillips. The company hopes to begin production at its first ethanol plant in early 2010.[22]
Tyson Must Take Advantage of the Growing International Protein Market
With the 2008 acquisition of three vertical chicken processors in Brazil and the planned acquisition of protein processor Shandong Xinchangn in China, Tyson Foods is gaining world market share. The company is looking to further build its international holdings in pork and red meat, specifically in China, India, and South America. Tyson is well positioned to capitalize on the highly fragmented protein industries in these countries by consolidating smaller companies and increasing their economies of scale. However, with the falling prices of chicken and pork, the company must successfully integrate and any future acquisitions while posting lower revenues. Tyson Foods has $250 million in cash on its balance sheet and will be able to rely on these reserves in the short term, but will have to maintain profitability in the long run.[23][21]
Competition
Because Tyson produces in four main segments, chicken, beef, pork, and prepared foods, it must compete against companies ranging from those that specialize in one of these segments to companies that compete in each of these segments. In short, Tyson's competitors depend on the segment of business. There are five competitive elements that the company focuses on: brand identification, breadth and depth of the product offering, product quality, customer service and price.
- Beef:Tyson is the leading processor of beef products in the U.S., with 25% share of the domestic beef market. Excel and Swift Foods are the firm's closest competitors, with 22% and 14% market share, respectively.
- Chicken: Tyson is the second-largest domestic chicken processor, with 21% share of the U.S. market, trailing only Pilgrim's Pride (PPC), which holds 25%.
- Pork: Tyson is also the second-largest domestic producer of pork, with 18% share of the market. Smithfield Foods (SFD) holds 25% of the pork market share.
| Company | Revenue 2006 ($M) | Operating Income 2006 ($M) | Revenue 2005 ($M) | Operating Income 2005 ($M) | Revenue 2004 ($M) | Operating Income 2004 ($M) | Operating Margin 5-year Average (%) | Global Presence (# Countries Exported to) | International Sales as % of Revenue 2006 (%) |
| Tyson Foods | 25,600 | (-77) | 26,000 | 745 | 26,400 | 925 | 2.63% | 80+ | 8.2% |
| Smithfield Foods (SFD) | 11,400 | 279 | 11,200 | 454 | 9,200 | 254 | 2.47% | 36+ | 6-9% |
| Pilgrim's Pride (PPC) | 5,200 | 3 | 5,700 | 436 | 5,400 | 265 | 3.72% | 10+ | 8.3% |
| Hormel Foods (HRL) | 5,700 | 451 | 5,400 | 426 | 4,800 | 380 | 7.84% | 40+ | <4% |
| Sanderson Farms (SAFM) | 1,048 | (-27) | 1,053 | 113 | 1,095 | 150 | 7.84% | 10+ | 6.6% |
References
- ↑ TSN 2009 10-Q
- ↑ 2.0 2.1 TSN 2009 10-Q
- ↑ TSN 2009 10-Q
- ↑ 4.0 4.1 4.2 TSN 2009 10-Q
- ↑ TSN 2009 10-Q
- ↑ TSN 2009 10-Q
- ↑ TSN 2009 10-Q
- ↑ TSN 2009 10-Q
- ↑ TSN Q4 2009 10-Q, p. 3
- ↑ TSN Q4 2009 10-Q, p. 40
- ↑ TSN Q4 2009 10-Q, p. 38-39
- ↑ TSN Q1 2010 10-Q, p. 3
- ↑ TSN Q1 2010 10-Q, p. 32
- ↑ TSN Q1 2010 10-Q, p. 34
- ↑ TSN Q1 2010 10-Q, p. 35-36
- ↑ China Slaps Anti-Dumping Measures on Chicken Goods, Fox Business, 2/4/2010
- ↑ Tyson Foods Inc. F4Q08 (Qtr End 9/27/08) Earnings Call Transcript.
- ↑ Tyson Foods Inc. F4Q08 Earnings Call Transcript.
- ↑ 19.0 19.1 Chicken should lift profit at Tyson Foods.
- ↑ Higher Commodity Prices Take a Bite out of Tyson Foods' 2008 Earnings.
- ↑ 21.0 21.1 Tyson Foods could seek pork, red meat buys in China, India, Brazil, Argentina.
- ↑ Tyson Foods Inc. F4Q08 (Qtr End 9/27/08) Earnings Call Transcript 3.
- ↑ Tyson Foods Inc. F4Q08 (Qtr End 9/27/08) Earnings Call Transcript 3.
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