Friday, 31 January 2014

Still beefing up: Tyson Food shares continue to impress

I have written a couple of times about Tyson Foods.  It is not the most fashionable company but it struck me that the chicken/beef/pork/prepared foods entity was mis-understood, especially as it kept on exhibiting strong pricing power and offered access to a global rising demand for protein, as this chart exhibits:

The shares have powered through the US$34 share price target level I mused upon in mid-November (link here).  In fact - as far as I can figure out - the share is now trading at an all-time high:

The key chart from the release is this one showing the margin movement.  Note how it was positive just for chicken and beef though, respectively helped by lower grain prices and a shrunken US national herd size. 

Otherwise, pricing power remains strong, with an overall 2.4% point improvement in prices and a 2.5% point improvement in volumes (both on a year-on-year basis).  There are not too many companies out there at the moment who are posting such balanced metrics. 

Looking at the projections for the rest of their 2014-15 fiscal year though and I note that despite the tailwind of a US$600m equivalent of lower feed costs, the company sees the chicken division generating a full-year margin in the range of 5-7%.  Similarly the beef division is in a 6-8%.  Only prepared foods (the smallest profit generator) is forecast to produce a full year margin higher than that achieved in Q1. 

Trying to factor this into full year operating profit, I get a figure of around US$1.5bn which would imply the share trades on around x9.3 EV/ebit 2014/15e.  If the company continues to be successful in ironing out the natural volatility of agricultural commodity cycles, this still offers some valuation expansion scope (x10 EV/ebit anyone?).  Cash flow remains good too, with a free cash flow yield of over 6% and a debt:equity ratio of just x0.7. 

So, from a couple of initial purchases below US$28 it has been a great holding over the last six months.  It does get tougher from here for the company but they are still executing.  My interpretation of this is to sell half my position and set a new target price for the residual position of US$40.  This would be equivalent to x10 EV/ebit 2014-15 using my numbers. 

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