Monday, 23 November 2015

Impressive quarter and guidance from Tyson Foods...not that I still own the stock!

Tyson Foods is an impressive performer today with the share up 9% or so.  Longer-term readers may recall that the company was on my 'stocks for 2014' list and I made a great turn in it from later 2013 to early 2015, exiting a little over the US$40 level.

Until today the stock had broadly tracked sideways as shown below...


...but today's break to just under the US$48 share price level at the time of writing reflects something different.  In short Tyson's always strong cross-category position...


...has been augmented via the Hillshire purchase around fifteen months ago into a company with a far stronger prepared foods position (an area which only the currently superlative chicken business currently generates a higher operating margin in).  

After making well over US$10 when I sold in the early US$40s I admit I was rather sceptical of the Hillshire push. Not so much the general strategy - the generally steadier nature of prepared foods makes it an ideal area to expand into - but rather the price paid and the resulting multiple expansion. 

Well more fool me - to a degree.  Today's guidance for FY16 suggests a capability to push above US$2.5bn in operating profitability at around a US$1.6bn free cash generation level - cash being used to continue buying back shares as well as pay the current 1% dividend yield (and also continue reducing debt with a target to push this below x2 ND:ebitda sooner rather than later).  

So even with today's share price romp the shares are trading on less than x11 EV/ebit FY16e and a pleasant higher single digit free cash yield - hardly a disaster at all.  And looking at the above it is clear that some parts of the business - the Beef division clearly - could have gone a lot better.  

The trouble is that's the meat processing and retailing business.  Even in a generally highly confident conference call there were plenty of mentions of at-the-margin events.  Even Tyson's leading position in most of its areas of operation cannot save it from some of these inevitable agricultural markets challenges.  

And that's why I prefer to pay a lower multiple i.e. single digit EV/ebit.  Impressive numbers but on a risk-reward basis I am noting down that c. US$43 level for a x9s prospective EV/ebit entry point and sub US$40 for something below x9.  

Of course I could have held it all the way through - but the big Hillshire acquisition worried me at the time.  I am glad for the company that it appears to have worked through strongly.  Big deals don't always.  

No comments:

Post a Comment