krause fund research spring 2018 · 2018-04-18 · tyson foods (tsn) consumer staples – food...
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Tyson Foods (TSN) Consumer Staples – Food Products
Krause Fund Research
Spring 2018
April 17th, 2017 Stock Rating:
Ethan Eiler Michael Gerot [email protected] [email protected]
Alanson Tobias Alexander Quist [email protected] [email protected]
SELL
12 mo. Performance
TSN v. S&P 500
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P/E, ROE, EV/EBITDA
TSN v. Sector v. Industry
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Analysts:
Investment Thesis
Target Price: $67-$71
12 Month Performance
Earnings Estimates
Company Description
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A M J J A S O N D J F M
TSN S&P 500
Source: Yahoo Finance
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P / E R O E EV / EBITDA
TSN
Food Products - Meats
Consumer Staples
Relative Financial Performance
Source: Bloomberg
Tyson Foods (NYSE:TSN) is the world’s second largest
meat processor behind JBS SA. Tyson earns revenue
through five reportable segments: beef, pork, chicken,
prepared foods, and other. In their chicken segment,
Tyson has a vertically integrated operation, while the
beef and pork segments have buyers and processing
plants. Tyson also has a portfolio of companies under
their umbrella that contribute to company revenue;
some of the major companies under their brand are as
follows: Jimmy Dean, Hillshire Farm, Sara Lee, Ball Park,
and Wright Brands
Tyson Foods has proven to be an industry-leading producer among meat packaging companies in the food products industry. However, we believe that increased competition from developing companies within the food products industry who are better positioned in emerging markets will limit Tyson’s revenue growth. These expectations along with our projections for input prices, such as beef, pork, corn, and soybean meal, point towards limited growth at the current price of $71.29.
Drivers of Thesis
While TSN has had total revenue decrease at a CAGR of -2.57% in the past three years, JBSA and Pilgrim’s Pride have experienced higher revenue growth, with their total sales growing at a CAGR of 6.10% and 7.13% respectively. Based on this revenue growth and consumer trends towards leaner meats and organic options, TSN’s competitors remain better positioned for growth in the meat and prepared foods markets.
The price fixing allegation and potential lawsuit against Tyson could harm Tyson’s bottom line and public perception to consumers.
Management’s recent acquisitions of companies that specialize in steam ovens and pizza crustsmake our analysts question their corporate strategy and future growth potential.
Rising estimates for input and output commodity prices lead us to believe Tyson Foods’ marginswill begin to shrink.
Risks to Thesis
Our valuation of TSN is dependent on the expectation that agricultural commodity prices, which serve as inputs to Tyson’s products, will increase throughout the forecast horizon. Variance fromthis expectation could lead to stronger than expected operating margins.
Our current estimated five-year revenue growth is expected to be 1.60%. However, stronger than expected demand for some of Tyson’s more volatile revenue segments would raise our revenue growth from its sluggish expectations.
1
Our team is issuing a SELL rating for Tyson Foods, Inc.
(NYSE:TSN) for the Krause Fund Portfolio. Although we
anticipate that revenue will grow at 2.4% for Tyson in
2018, our team does not believe that Tyson is well
positioned to compete in the growing meats markets
compared to their competitors. With an increase in
management acquisitions of noncore businesses, TSN’s
competitors are better positioned for growth in the meat
and prepared foods industry. Additionally, with the
possibility of a litigation penalty for price fixing in the
chicken market, our expectation for commodity prices to
increase, and the non-vertically integrated beef segment,
we expect Tyson’s bottom line and operating margins to
be negatively affected in the future.
Our DCF model yields a price of $70.04 on a relative basis,
which indicates that Tyson’s security is overvalued by
1.75%. Based on these expectations, we see limited
growth potential at the current price of $71.29.
Real GDP
Source: TradingEconomics – Real GDP Growth Rate3
GDP is one of the major indicators of the availability of
growth in the consumer staples sector where a mature
product will seemingly grow relative in comparison to
GDP growth. The graph above indicates that U.S. GDP has
increased since the start of fiscal year 2016. The
Conference Board predicts that United States GDP will
rise and remain steady at 2.9 percent in 20185.
Additionally, per capita Real GDP is expected to increase
from $57,290 in 2016 to $65,870 in 2020.3 Gains in U.S.
real GDP growth will sustain Tyson Foods’ long-term
growth rate because positive movements in real GDP
growth represent increases in consumer spending in the
U.S. economy. While an increase in consumer spending
helps to grow the economy, Tyson Foods tends remain
non-cyclical as food in general tends to be in demand all
the time. While this makes Tyson Foods a great holding
when in a downturn market, the growth rates are not
nearly as great in a healthy growing economy.
Consumer Price Index (CPI)
Source: Bureau of Labor Statistics4
Recent estimates from the Bureau of Labor Statistics
suggest that the Consumer Price Index has risen 2.1% in
20184. In the graph above, we see that inflation has
continued to rise since 2015. Historically, spending on
nondurable goods has shown not to decrease as inflation
increases. Rising Consumer Price Index changes will allow
Tyson Foods to increase prices onto the consumer as the
year over year change in the price of other consumer
products increases. As Tyson increases the prices of their
products, the company’s revenues will increase. This is
beneficial to Tyson as revenues will increase without the
threat of decreased sales. The increase in CPI will allow
producers like Tyson to pass-on some of the increased
operating costs from high raw materials inputs such as
corn and soybeans, on the price of meats.
Macroeconomic Outlook
Executive Summary Exee
2
U.S. Population Growth
Source: Statista22
In correlation to real GDP growth, population growth is
another major opportunity for growth. The Krause Fund
and its analyst recognize that that amount of food a
single population consumes will not change
fundamentally unless there is a change in the total
number of people consuming that product. The United
States population is expected to increase by 335.65
million people by 2022, calculated out to a compound
annual growth rate (CAGR) of .68%. In combination with
the increased consumer disposable income, the
expected increase in the U.S. population will continue to
increase demand for meat and Tyson Foods products.
Commodities
Beef
Source: Bloomberg Finance7
The latest quote from Bloomberg prices live cattle
commodities at 103.65 cents/lb.7 Based on historical
prices, 41% of total sales come from beef on average
from 2008 - 20171. A few cents increases per pound
raises expenses by millions of dollars, so the price of beef
heavily impacts Tyson’s financial performance.
Source: JPMorgan and USDA6
The graph above provides the number of cattle on feed
(about to be slaughtered) throughout 2017. As the graph
shows, the supply of cattle is at similar levels to the ten
year low. Lower levels of supply provides Tyson’s
suppliers with more bargaining power and the ability to
raise prices. If the levels of supply remain low into the
future, Tyson’s operating costs associated with their beef
revenue stream could increase.
Source: Statista24
We next evaluated the demand for beef to project how
price will react in comparison to supply. As the graph
above shows, demand for beef has fallen since 2000, and
it is projected to decrease slightly/remain relatively
constant in the next decade, with a CAGR of beef
consumption from 2018-2026 of -0.11%.
With supply decreasing and demand remaining relatively
constant, we anticipate the price of beef to rise in the
future specifically for the longer 2-3 year outlook, we see
cattle prices returning to their 2015 prices of between
160 and 170 cents per pound which will create a sizable
rise in cost of goods sold. We estimate live cattle prices
to stay between 120 & 130 cents per pound through the
rest of 2018. Beef remains one of the lower margin
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Cattle Futures
314.28
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U.S. Population Growth
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Beef Consumption in US
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segments, returning the least on average out of all
segments due to higher average prices and the process
Tyson Foods goes about obtaining the live product. Our
assumptions suggest that Tyson Foods must prepare to
pay higher prices for their beef or raise product prices
offloading the increased costs onto consumers.
Pork
Source: Bloomberg Finance7
The latest quote from Bloomberg prices lean hog futures
commodities at 77.65 cents/lb.7 12.89% of Tyson Foods
sales come from pork1. Similar to Tyson Foods operating
costs with beef prices, increasing per pound cost of pork
has a large impact on Tyson’s operating costs and
operating margins.
Source: USDA April 13, 2018, Hog Report35
As the five year average line on the graph above indicates,
pork supply is cyclical in nature. Pork reached a ten year
low for its supply to producers in 2017. Pork suppliers
currently have more bargaining power with Tyson due to
the decreased supply and ability to charge more for their
product.
Source: Statista25
After evaluating the current supply situation of pork, we
also considered the commodities demanded when
discerning how price will adjust in the future. Using pork
consumption as a proxy for pork demand, the graph
above indicates that pork demand is expected to
increase within the next year and slightly decline
thereafter with a CAGR for pork consumption from 2018-
2027 of .32%. With a decline in supply and demand
remaining relatively constant, we recognize the rise of
pork prices on a short term basis within the next four
months with a July pork futures price of $79.90 - $77.63
compared to the current April price of $54.38 - $53.60.
Following the cyclical trend we expect a decline in pork
prices as production begins to increase in August, to a
price in the range of $65.00 - $70.00.
Poultry
Source: OECD26
Chicken consumption has grown quite extensively since
2014 as seen in the graph above. Fueled by the trend
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Lean Hog Futures
49.9
52.1 52
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Pork Consumption in US
83.3
89.891.5
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Chicken Consumption in US
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towards healthy lean meats, we anticipate demand for
chicken to continue to increase with a CAGR for chicken
consumption estimated at .21% according to OECD data.
Krause Fund analysts believe that the numbers above are
fairly modest, and we anticipate chicken consumption to
grow around 1.5% annually through 2022.
Source: Chicken Production38
Based on the graph above, using chicken production as a
proxy for supply, chicken supply has increased steadily
over the past decade without much volatility. The USDA
estimates that poultry production is expected to rise 2%
to a record 19 million tons, or around 38 billion pounds
in 2018.10 Based on consumer trends toward lean white
meats and protein packed products, we anticipate the
production of chicken to continue to rise in the future at
a growth rate of 2%-2.5%.
Source: Bloomberg Finance7
The most recent price quote for a whole chicken from the USDA was $1.50/pound at March 31, 2018.8 As we stated above, we anticipate chicken demand to stay constant/increase slightly increase while we also project supply to steadily increase into the future. Therefore, based on economic theory, price should increase with the steady demand and increased production. However, chicken prices are currently at a 12-year low. So, we
believe that chicken prices will stay steady around $1.50/pound in the next six months with little price volatility. In the next 2-3 years though, we anticipate chicken to rise substantially to historical levels.
Agricultural Commodities
To further evaluate the price of poultry, we chose to
weigh the supply and demand of the major animal feed
inputs such as corn and soybean meal which serve as
major drivers for the price of poultry.
The rise in the price of corn and soybean meal have a
drastic effect on Tyson Foods costs. In 2017 corn and
soybean, all used as feeds, represented 55% of the cost
of raising live chickens in the U.S. for Tyson Foods. The
chicken segment accounted for 30% of sales in 20171.
The Krause Fund believes understanding the current
market outlook for corn prices will help investors analyze
the impact higher corn prices have on Tyson’s
operational costs.
Corn
Source: April 2018 WASDE9
As we can see from the graph above, global supply and
demand are expected to increase slightly through 2020.
We recognize this demand as the catalyst for a rise in
prices of corn futures.
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Global Demand for Corn
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2000 2003 2006 2009 2012 2015 2018E
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Chicken Production
$1.00
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Source: Bloomberg Finance7
The current price of corn sits at $3.93/ bushel. In corn
pricing forecasts, a growth into year 2020 provides an
expected price of $4.07/bushel near the highest point
and return to $3.90/Bushel by 2022 averaging a
continual increase as we expect this demand to rise with
population growth. This expected future increase is
derived from the increase in demand for corn.
Soybean Meal
Source: Bloomberg Finance7
Soybean meal is currently priced at $3.86/bushel which
is uncharacteristically high compared to historical levels
relative in the past two years of around $3.20 in the
spring season.7 Based on historical seasonality of
soybeans meal, we anticipate that the futures price will
decrease in the next three months to around
$3.50/bushel based on the seasonal history of prices.
However, over the next year we anticipate soybean meal
prices rising year the end of the year to around
$4.00/bushel. Increasing soybean meal prices will impact
Tyson’s prepared food and chicken segments as a
necessary input. The analysts of the Krause Fund, believe
that as soybean meal follows a trend Tyson Foods has the
ability to mitigate risk and hedge against price inflated
times.
Source: April 2018 WASDE9
Crude Oil
Source: Statista27
Crude oil serves as a major influencing factor in Tyson’s
operating costs because an increase in crude oil can drive
up transportation and shipping costs related to bringing
products to market. Following a major collapse in 2015,
crude oil prices have steadily risen since 2016, and we
anticipate crude oil prices to continue to rise with some
regularity as tensions continue arise throughout the
world, we see the possibility of oil taking advantage of
tensions in trade. We anticipate WTI Crude Oil to
increase to $70 by the end of 2019 and move towards
$75-80 in the longer run.
Aggregate Commodity Price Analysis
In our opinion, the increased prices of these three
commodities represent growing demand for the
products they are used to make. Margins have a
significant effect on our calculated intrinsic value
because of the large competitive space. In 2008, Tyson
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Soybean Meal Futures
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Global Soybean Useage
$96.29
$52.51$65.17
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WTI Crude Oil Prices
6
Foods cost of goods sold margin alone was 93.53% of
sales. However, Tyson has worked to decrease that
number to 84.73% in 2017. When valuing Tyson Foods,
based on our expectations for supply and demand of
commodities, we assumed that our cost of goods sold
number would increase and move directional with
commodity prices. This projection constituted one of the
main reasons that the Krause Fund is recommending a
sell for Tyson Foods.
Industry Classification
The food products industry consists of two main sectors:
packaged foods & meats and agricultural products. Most
of the market share in this industry is dominated by
companies that process, package, and ship meat directly
to brick and mortar retailers. However, there is still a
small portion of the food products industry that is
composed of agricultural producers that directly harvest
and sell their raw materials to large processors.
Collectively, the food products industry composes a large
portion of personal consumption expenditures with 69%
of October 2017 GDP being a product in the food
products industry.10
The food products industry, much like the rest of the
consumer staples sector, is mature and predominantly
resistant to the economy’s cyclicality. This means that
although demand will increase over time directly
through steady population growth, companies in this
industry will only gain market share through direct
competition. In turn, the food products industry is
heavily dependent on new organic revenue streams and
acquisitions.
Industry Trends Changing Consumer Preferences The primary industry trend that is sweeping through the
food products industry is the increased demand for
healthy food options, with sales in 2017 for healthy food
options being recorded at over $1 trillion. According to a
PricewaterhouseCoopers report on the food products
industry, 90% of consumers indicate that they are willing
to spend more money on organic and health food
options to receive a higher quality product.47 This
preference is expected to make organic food revenues
reach $81.6 billion in 2018, which is a 29.6% increase
from 5 years ago.11
Source: USDA Economic Data @ 20178
The graph above represents the historical amount of
meat and poultry that a single American ate in a year,
and the expected amount, (222.2 lbs.) that a person will
eat in 2018. This proves useful for Tyson as the
consumption of meat has increased since 2014 and is
expected to hit a record high within the coming year,
beating historical averages from 2007 which was
(221.7).8 As this trend continues, producers in the food
products industry will cause price to be a major point of
competition going forward. Producers will have the
option to transfer the increased prices for organic inputs
onto consumers, directly correlating to lower volumes of
sales.
Research in Nutrition In accordance with the consumer preferences trend
towards organic and healthy food options, industry
leaders have accordingly increased their R+D spending
on the technology. One specific advancement that
companies have been investing in is the technology that
allows scientifically engineered meats and non-meat
protein to be produced in combination with regular meat
protein. This technology is based on the ability to extract
protein from wheat and soy into a product that
resembles meat. This appeals specifically to consumers
because it looks, smells, and tastes exactly like meat
while still providing the added nutritional value.13,14
Industry Analysis
7
Investment in Nutritional Companies Campbell Soup Co, one of Tyson’s competitors in the more broad food products industry, was one of the first companies to invest in organic and healthy food options in 2017 when they acquired Habit for $32 MM. Although it is impossible to contribute all shareholder returns to this acquisition, Campbell denoted in their 2017 10k that following the Habit acquisition, their operating margins increased by 7.15% in 2017 to 20.99% and their EPS grew at 3.9%28. Campbell’s CEO Denise Morrison also offered the guidance that they believe that their company performance was so successful after the acquisition because the entire food industry is being transformed29. In line with the Habit acquisition, one of Tyson’s major acquisitions so far in 2016 was a 5% equity investment in Beyond Meats, who specializes specifically in plant protein. While we anticipate this acquisition to have a positive impact on Tyson’s prepared food segment, it is hard to predict the realized gains from this research and investment. Although not all acquisitions in the nutritional market are guaranteed to produce returns and operational efficiencies, all companies in the food products industry will be looking for latent markets to enter in the future. Industry M&A Activity
Source: Capstone Partners30
Large market share and slower growth exemplifies the traits of the maturity of the food products industry. While we do see certain opportunities for growth in the industry, we understand that the amount of internal growth that is possible through innovation is limited in this mature stage. As the industry sees stagnation, and slowing growth rates, we are beginning to see a larger uptick in M&A transactions. As the graph shows above, there were 253 Food & Beverage industry M&A transactions announced or completed in 2017, which is a 3.68% increase from fiscal year 2016.30
As we mentioned above with the increased consumer
demand for health focused and organic products, the
M&A markets have also seen an uptick in deal flow in the
Better For You (BFY) market, with a 50% in fiscal year
2017.30 Below is a table of major deals from the third and
fourth quarter of 2017.
Source: Capstone Partners30
International Sales
Source: IBIS World Industry Overview31
The graph above shows the market segmentation for the
meat industry in 2017, which grew by 2.1% to become a
$240 billion-dollar international industry in 2017.
However, international sales/exports in 2017 declined by
$.3 billion.31 International sales have been a topic that
has been particularly relevant to Tyson in the past three
years because they have had a hard time maintaining
value through their international segment. In 2015,
Tyson Foods sold their entire international operations in
Mexico and Brazil to industry rivals JBS and Pilgrim’s
Pride. However, in October of 2017, Tyson hired a new
President of International Operations, Noel White, who
has reinforced their presence in China. With White’s
strategic plan, Tyson has reinforced operations in China
46.00%
29.50%
22.40%
2.10%
Product Segmentation in Meats Industry
Slaughtered AnimalProducts
Poultry
Processed Meats
Meat by Products
8
and started joint ventures in the following Chinese cities:
Rizhao, Dalong, and Nantong.1
Going forward, we believe that international operations,
specifically those in China, will be a threat that could
impact Tyson’s financial performance. In an effort to
obtain “fair trade” for the United States, the Trump
administration has potentially started a trade war with
China, which could lead Tyson’s exports to China (pork,
chicken, beef, etc.) to be taxed with a 15% tariff. Tyson
already recorded a $169 million impairment charge in
2015 to shrink their international operations1. If this
tariff with China stands and turns out to be too expensive
to maintain these international operations, we anticipate
that Tyson’s bottom line could, again, be negatively
impacted by having to scale down.
Industry Players
JBS USA – JBS USA is the American and Australian arm of
JBS SA, which is the Brazilian conglomerate that is the
world’s largest protein processor. JBS has five main
revenue streams from the two dozen brands within their
portfolio: beef, chicken, pork, sheep, and lamb. JBS’s
revenue has also experienced a CAGR of 4.6%, and they
have grown significantly through acquisition by
purchasing Cargill’s pork segment and Pilgrim’s Pride.31
Smithfield Foods Inc. – Smithfield Foods is the world’s
largest pork processor and hog producer, and Smithfield
also has a very significant international presence, with
operations in China, Mexico, and throughout Europe.
Similar to JBS, Smithfield has also tried to fueled revenue
growth with over 30 acquisitions since 1981.31
Smithfield’s company strategy is to use vertical
integration to gain a competitive advantage over other
industry players.
Cargill Inc. – Cargill is an international processor of
agricultural and food products with significant
operations in Central America, Asia and Europe. The
company’s main revenue streams are beef, turkey, and
poultry with their main brands being Honeysuckle White,
Circle T Beef, Sterling Silver Premium Meats, Angus Pride,
Rumba, Good Nature.31
Hormel Foods – Hormel is a multinational manufacturer
and processor of meats and food products, with their
main revenue streams coming from the following
products: hams, bacon, sausages, franks, canned lunch
meats, stews, chilies, hash, meat spreads, shelf-stable
microwaveable entrees, salsa and frozen processed
foods.31 Historically, Hormel has offered fresh pork as its
main products, but their company has heavily diversified
their product offerings in the past five years.
Pilgrim’s Pride – Pilgrim’s Pride, majority owned by JBS
SA, is the largest chicken producer in the United States
and Puerto Rico. Pilgrim’s Pride is unique compared to
other companies in the meats industry because its only
revenue stream is chicken. Their company also serves as
the supplier for the following major companies: Kentucky
Fried Chicken, Walmart, Publix, and Wendy’s.31
Source: IBIS World31
As the market share graph shows above, besides Tyson Foods and a few other major players, the meats market is relatively fragmented. Additionally, with the food products industry being very mature and resistant to most economic cyclicality, there is no room for organic growth in the market. Historically, Tyson’s revenue streams have profited from strong brand recognition and high market share. However, industry rivalry has heightened, specifically in the chicken market, and firms are vying for market share. Consequently, Tyson lost 4% of the meat market share in 2017, with Pilgrim’s Pride and JBS SA serving as Tyson’s emerging competitors.1
Industry Specific Comparisons
When it comes to industry comparisons we found it important to look at industry specific constructs that would allow us to better understand the ways that our industry obtains higher margins, lower costs, and overall advances past competitors. We testest our reserarch using Hormel Foods and Smithfield Foods when
14%
56.80%
2017 Market Share in Meats Industry
Tyson
JBS USA
Smithfield Foods,Inc.Cargill Inc.
Hormell Foods
Pilgrim's Pride
Other
9
comparing to Tyson Foods because of the correlation between intergration in supply chain techniques. Meat Sales Growth
Source: Company 10-K’s32,33,34
Compared to historical levels and growth, sales revenue in the past few years has been underwhelming. Tyson Foods did rebound from a down year in 2016 by increasing sales revenue in 2017 by $1.3 billion which was partly due to a number of acquisition during FY 2017. JBS USA, one of Tyson’s main competitors, however had sales fall by $3.2 billion dollars in 2017. Operating Margin
Source: IBISWorld31
Evaluating the profitability of companies within the food
products industry is helpful in understanding a
company’s cost structure and management’s ability to
deal with the fluctuation of agricultural input prices.
Referencing the graph above, Tyson Foods has the
strongest operating margin at 8.36% amongst its
competitors in the meat industry, which is 1.18% higher
than recorded in 201631. We attribute this increase in
Tyson’s operating margin to the decrease in price that
pork and beef experienced in the second half of 2017.
Going forward, we anticipate Tyson’s operating margin
to decrease as most agricultural commodities that Tyson
Foods uses as inputs are expected to increase in 2018.
Inventory Turnover
Source: Company 10-K’s32,33,34
Inventory turnover is an important measure in the meat
markets because it defines how often and how efficiently
a company can liquidate its inventory (typically inventory
that can expire very quickly). As the graph shows above,
Tyson had an inventory turnover of 11.12 in 2017, which
deteriorated by 3.05% from 2016. This percentage
translates into inventory have an outstanding life of
32.81 days in 2017. JBS USA serves as the biggest
competitor to Tyson in terms of inventory turnover due
to their higher efficiency with inventory management.
Going forward, we anticipate Tyson’s ability to manage
its inventory to stay relatively constant. However, we
anticipate their peers to become more efficient with
their management of inventory.
Shareholder Stock Returns
Source: Bloomberg Finance7
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s
Meat Sales Growth
11.12%14.31%
7.51% 8.33%
-20.00%
-10.00%
0.00%
10.00%
20.00%
Tyson FoodsInc.
JBS USA HormelFoods
Pilgrim'sPride
Meat Industry Inventory Turnover
Inventory Turnover % Change
8.36% 7.79% 7.04%
3.24%
-5.00%
0.00%
5.00%
10.00%
Tyson FoodsInc.
JBS USA SmithfieldFoods, Inc.
Cargill Inc.
Meats Industry Operating Margin
Operating Margin % Change
10
Traditionally, the consumer staples sector is viewed as a
defensive industry in the economy. Accordingly, with the
strong bullish market from the past few years,
shareholder returns for companies within the food
products industry have stayed relatively constant. Since
December 31, 2017, Tyson has a -12.43% period return.15
Despite a positive Q1 2018 earnings report, these poor
shareholder returns could only be compounded with the
pending price fixing litigation and potential Chinese
tariffs. However, while we believe that there is limited
opportunity for growth beyond the current price based
on our model’s intrinsic value, there is also the possibility
that the given Tyson’s current low volatility over the past
year could denote that Tyson and its comparable
companies have bottomed out and could experience
increased returns in the future.
Industry Competition - Porter’s 5 Forces Threat of Competitors: High and Steady – The meat
packing and production market is highly fragmented. As
mentioned earlier, six companies in the meat industry
hold 43.2% of the market while the other 56.8% of the
market is composed up of over 800 smaller companies31.
In this industry, there are a large number of buyers and
sellers for various revenue streams, so there are strong
levels of competition amongst businesses. Companies in
the meats industry compete on price, product
differentiation, and international sales; we also believe
that the levels of competition are steady due to the
maturity of the market, but competition in this industry
can vary based on the seasonality of the products, as well
as supply and demand.
Threat of New Entrants: Low and Decreasing – The
threat of new entrants in the meat industry is relatively
low as most of the major companies within the industry
have an economic moat based around their market
ownership and the cost to enter the space. As of 2016
Tyson controlled 21% of the chicken market, 24% of the
beef packing market, and 18% of the pork packing
market.1 Along with this, in each industry, the four major
packers and producers held 53% of the chicken
production market, 75% of the beef packing market, and
71% of the pork packing market.31 With the increased
number of acquisitions in the past five years by major
industry players, we only anticipate these numbers to go
up as companies in this industry are looking to establish
economies of scale. Additionally, we also see minimal
space for new entrants as they will be unable to compete
on price and product differentiation compared to some
of the big conglomerates in the industry.
Threat of Substitutes: High and Steady – One of the main
points of competition within this industry is price. Even
though the modern consumer, who has increasing
disposable income, is willing to spend more for organic
products, most consumers are willing to purchase the
most price-optimal product during times of economic
recession. In turn, the threat for major companies to
have their products substituted for cheaper products
remains high and steady. However, it is worth noting that
there is significant opportunity growth in the plant
protein markets with few substitutes for goods of that
nature – this is one of the main reasons that Tyson Foods
saw opportunity when it acquired Beyond Meats.
Bargaining Power of Buyers: High and Decreasing – The
large players within the meats industry have taken the
role of pricing meat that they purchase and serve, as
price makers. However, based on the lawsuits against
many major buyers within the chicken industry for price
fixing, companies may now have less control over the
price that they will be able to set in the market.
Bargaining Power of Suppliers: Low and Steady – In
contrast with the bargaining power of buyers, the
suppliers bargaining power in the meats industry is
minimal. As the large companies in the industry can drive
prices down, most suppliers are obligated to provide
their goods at the cost that the large market share
companies decide on. The suppliers in the meats industry
also take on huge overhead costs and the
unpredictability of commodity pricing that could change
drastically in a year based on weather and other
seasonality factors.
Business Description - Started in 1935 as a one-man
poultry operation, Tyson Foods has grown into the
world’s second largest meat processor behind JBS SA.
Tyson earns revenue through five reportable segments:
beef, pork, chicken, prepared foods, and other. In their
chicken segment, Tyson has a vertically integrated
operation, while the beef and pork segments have
buyers and processing plants. On top of their own
Company Analysis
11
operations, Tyson also has a portfolio of companies
under their umbrella that contribute to company
revenue; some of the major companies that Tyson has
acquired to be under their brand are as follows: Jimmy
Dean, Hillshire Farm, Sara Lee, Ball Park, and Wright
Brands. With a relatively new CEO, Tyson Foods has been
focused on external growth through acquisitions into less
mature markets such as plant based proteins.
Corporate strategy –
Source: Tyson Processing Centers18
With the food products industry being relatively
established, Tyson’s primary corporate strategy is to
identify latent markets where there is opportunity for
organic revenue growth. Additionally, Tyson has also
been trying to increase their brick and mortar footprint
across the Midwest and southern United States. In 2017,
Tyson increased their raw number of processing plants
across their four major production lines by 11%. Since
their major customers are large retailers, this trend is to
cut down on transportation costs. As the graph above
indicates, Tyson is strategically leasing properties around
major southern and Midwestern cities to gain a larger
footprint and establish contracts with major retailers.
Environmental and Social Governance - With more
consumers becoming passionate about companies that
make ethical corporate decisions, a scale for
environmental, social, and governance (ESG) awareness
was made to evaluate companies. Tyson received a
composite score of 51 out of 100 which scored in the 27th
percentile to comparable peer companies12. This
denotes that Tyson is lagging behind their competitors in
the food products industry in terms of sustainability
initiatives. Tyson’s resistance to environmental
governance is also seen through the impending litigation
regarding poultry price fixing that could negatively
impact the company’s bottom line.
Price Fixing Allegation
In the middle of 2016, Tyson, who controls around 40%
of the chicken market with competitor Pilgrim’s Pride,
was first accused of fixing the price on chicken. In their
2017 10-K, they indicated that the SEC had received a
subpoena to investigate their company for these
allegations.1 However, nothing ended up materializing in
their investigation. Just recently, though, Sysco and US
Foods filed another lawsuit against Tyson and 16 other
major market makers, who control 90% of the chicken
market share, for restricting the supply of chicken and
manipulating the price of chicken to gain a competitive
advantage.
Just last year, Bumble Bee, one of the major players in
the Tuna market, plead guilty to price fixing and was
forced to pay a $25 million criminal fine.17 We did not
build the possibility of Tyson having to pay a potential
litigation expense into the model as it seems unlikely that
they will have to pay any litigation expense based on
their past interactions with the SEC. However, if Tyson
were found guilty of price fixing, using the Bumble Bee
case, we estimate that their criminal fine would be
between $35-40 million as they have similar market
share as Bumble Bee but in a larger market. We also think
that if Tyson were to be found liable for this allegation,
the revenue growth in the chicken segment would be
negatively impacted across all three sensitivity scenarios
(best, realistic, and worse case).
Significant Customers
In the fiscal year of 2017, Wal-Mart Stores, Inc. (WMT)
accounted for 17.3% of Tyson Foods sales, which was
composed of sales from all four major business segments.
Tyson also made sales to restaurants, hospitals, food
retailers and wholesale distributors, however, no other
customer amounted for more than 10% of their sales.
Invariably, any disruption between Walmart and Tyson
Foods could be seriously detrimental to Tyson’s sales and
financial performance.1
12
February 2018 Earnings Release
Tyson released earnings on February 8, 2018 for fiscal Q1. Based on sell side analyst reports, Tyson was expected to report earnings of $1.51, $.08 lower than Q4. However, they reported adjusted EPS of $1.81, which came in well above estimates. One contributing factor to Tyson beating earnings projections is the reduction in federal tax rate which lowered the marginal tax rate by 14%. In Tyson’s Q1 earnings call, CEO Tom Hayes said that the tax changes were very positive for Tyson Foods and that they are realizing cost savings of approximately $300 million. Our analysts also recognize the beat on earnings attributable to an increase in sales volume and an increase in price although this increase in price was relative to cost of goods sold increase, further shrinking margins1. Hayes prefaced that some of these cost savings would be attributed to higher capital expenditures and movement toward acquiring minority and majority ownership in new companies.15 However, even though the bottom line benefited from the one-time decrease in federal taxes, we believe that Tyson will continue to be pressured by shrinking margins and forced to increase price on goods which could ultimately drive sales volume down.
Management and Recent M&A Activity
Although Tyson Foods’ management has presented
record earnings for the recent quarter, much of their
earnings growth can be attributed to recent acquisitions.
Our analysts recognize that companies that focus on
growing through inorganic avenues tend to return less in
the long run. An article by Marc Goedhart and Tim Koller,
both from McKinsey&Company, reminds us that “the
share-price performance of 550 US and European
companies over 15 years reveals that, for all levels of
revenue growth, those with more organic growth generated
higher shareholder returns than those whose growth relied
more heavily on acquisitions”39
Tom Hayes, CEO of Tyson Foods since the beginning of 2017,
has placed a large emphasis on the acquisition of varying
brands and innovative startup ideas, opening a venture
capital arm for Tyson Foods. With how much Tyson Foods
has paid for acquisitions, they are increasing their cost of
capital and have a lower opportunity to obtain a greater
return on invested capital. Accordingly, we believe that it
will be challenging for Tyson to grow earnings at this rate
going forward. Tyson’s most recent M&A transactions are
listed below:
June 7th, 2017 – Tyson acquired AdvancePierre Foods Holdings, Inc. for $40.25 per share, translating to a $3.2 billion transaction. AdvancePierre specializes in the production and distribution of ready-to-eat sandwiches, entrees, and snacks.19
November 13th, 2017 – Tyson acquired Philadelphia-based Philly Holdings, Inc. Philly Holdings is a leader in a very specialized product: Philly-style sandwich steak and cheesesteak appetizers.20 Strategically, this acquisition made sense for Tyson because management is looking to prioritize their focus on protein, and this product offers a niche market in the meats industry. We believe that this acquisition will allow Tyson’s prepared foods revenue segment to continue the high level of growth that it experienced in 2017, with a recorded 6.9% revenue growth in 2017.1&23
According to the 2018 Q1 10-Q, these two acquisitions translated into realized gains of a $291 million increase in poultry sales and a $397 million in prepared food sales. These transactions also fueled operating income in the poultry segment to increase by $9 million and prepared foods to rise by $71 million derived from prepared food.2
January 29th, 2018 – Tyson Ventures, Tyson Foods’ venture capital arm, takes a minority stake in Memphis Meats, a food technology startup that is a leader in artificially producing meat from animal cells.21
February 6th, 2018 – Tyson Ventures invests in Tovala, a startup company that utilizes bar code technology to make internet connected steam ovens that prepare meals.40
February 9th, 2018 – At the beginning of January of 2014,
Tyson acquired Bosco’s Pizza Company, a provider of
bread sticks, pizza crusts, and frozen pizzas in the
Midwest.43 However, now a little over four years later,
Tyson has hired Goldman Sachs to attempt to sell Bosco’s
and some of its other non-protein lines that have had
sales drop significantly. They have tried to ask for $1
billion for their unprofitable lines but have only been
able to sell one segment (Kettle) for $125 million44. Our
analysts believe this is, yet again, another example of
Tyson’s management not knowing what direction they
want the company to take, and we think shareholders
will be negatively impacted by their uncertainty.
While the Krause Fund believes these acquisitions were
made with the intention for growth, we believe that these
13
acquisitions seem to be too far out from Tyson Foods core
business model to be successful over the long run.1
Products and Markets
Source: Tyson 2017 10-K1
Product Lines – Tysons main product lines, recorded as
segments, include Beef, Pork, Chicken, Prepared Food,
and Other. As the graph below denotes, the prepared
foods and chicken segments have been experienced the
most year over year growth in the past five years.
Source: Tyson 2017 10-K1
Beef
Tysons’ beef segment is based on operations involving
live fed cattle and is not vertically integrated, meaning
that Tyson Foods employs cattle buyers to purchase
cattle from live auctions and farms so that they do not
have to incur the cost of raising the livestock. This
revenue stream formed 38.75% of Tyson’s overall sales
in 2017.1 Although we recognize that there are costs
involved with investment in vertical integration, our
analysts see a loss in operating margins from non-vertical
integration in the beef segment, specifically with beef
possessing the highest percentage of sales revenue.
Pork
Tyson’s pork segment is based on operations involving
live market hogs. Similar to the beef segment, Tyson’s
pork segment is not vertically integrated. Instead, Tyson
buys live hogs using hog buyers who make purchase
agreements days before the animals are processed into
products. This revenue stream composed 13.7% of
Tyson’s overall sales revenue in 2017.1
Chicken
Tyson Foods chicken segment is associated with the
operations related to raising and processing chicken into
raw materials usable in fresh and frozen products; this
revenue stream composed 29.8% of Tyson’s total
revenue in 2017 and is completely vertically integrated,
which allows for a benefit of higher margins. Tyson’s
integrated chicken process starts with grandparent
breeder flocks, and ends with broilers for processing. In
2017, corn, soybean meal and other feed ingredients
represented 55% of costs related growing chickens’
domestically1.
Prepared Foods
Source: Tyson 2017 10-K1
In 2017, Tyson’s prepared foods segment accounted for
20.5% of overall sales.1 The prepared foods segment
includes their operations related to manufacturing and
marketing frozen and refrigerated food products and
logistics operations to move products through the supply
chain; this revenue stream also includes the following
brands: Jimmy Dean, Hillshire Farm, Ball Park, Wright,
State Fair, Van’s, Sara Lee, and Chef Pierre. Tyson’s
prepared foods segment is the revenue stream that has
been the most volatile for the company over the past
-
10,000.00
20,000.00
30,000.00
40,000.00
50,000.00
2015 2016 2017
Sales by Segment from 2015-2017
Beef Pork Chicken Prepared Foods Other5.7%
99.2%
6.9%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
2009 2010 2011 2012 2013 2014 2015 2016 2017
Prepared Foods Revenue Growth
38.7
13.729.8
20.5
0.9
-3.6 Tyson 2017 Revenue Decomposition
Beef
Pork
Chicken
Prepared
Other
Interegment
14
decade. As the graph above shows, Tyson experienced a
99.2% increase in revenue in 2015 from their acquisition
of Hillshire Farm. However, we believe that Tyson is
having a hard time determining their direction because
they denoted a disposition of some of their prepared
foods segments , such as Sara Lee Frozen Bakery, Kettle,
and Van’s for sale on their 2018 Q1 10Q that they had
originally attempted to grow via the Hillshire Farm’s
acquisition.
SWOT Analysis:
Strengths –
Source: Market Realist Vertical Integration16
Vertical Integration – One main reason why Pilgrim’s
Pride’s revenue is growing so quickly in the chicken
market can be attributed to their ability to vertically
integrate their processing. Tyson has followed suit and
has attempted to vertically integrate a lot of their
revenue streams. As the image shows above, rather than
simply purchasing their product from a supplier, Tyson
has grown their chicken segment to breed stock, raise
chicks, market, and then transport their finished goods.
This, on top of their increased carbon footprint and
expanding number of processing plants, allows Tyson to
reduce cost layers – meaning that they have higher
operating margins and more control over the product
that consumers buy.
Strong brand recognition – As a leading player in the
consumer staples sector, Tyson has strong brand
recognition with all its products regardless of the
segment. Strong brand recognition translates into
consumers attaching added value to Tyson Foods’ brands
because their company has historically always offered
high quality products. This also correlates with increased
financial performance when consumers have high
disposable income.
Weaknesses
Environmental concerns- Research from Environment
America indicated that Tyson, in FY17, was the second
largest polluter of American waterways behind AK Steel
Holdings.48 Tyson's management commented on their
views towards sustainability on their Q1 2018 earnings
call saying that they were willing to change their
practices but remained hesitant to any major shift
towards sustainability that would put them at a financial
disadvantage. This sentiment, in combination with
Tyson's ESG rating, demonstrates that until Tyson
changes their sustainability direction, they are at a
constant risk of potential litigation and contingent
liabilities.12
Opportunities
Organic Foods Revenue Stream – Coinciding with
management’s interest in growing some of their revenue
streams inorganically, there is significant opportunity
within the healthy foods/organic meats market. Due to
the consumer shift towards healthy BFY products, Tyson
Foods has been increasing their research and
development and investment in organic and plant-based
options. It is well known within the industry that this is
the future of meat, so significant opportunity exists for
Tyson Foods and its competitors to become the market
leader in this revenue stream.
International Expansion – Currently, 98% of Tyson’s
revenues are generated within the United States.
However, their company has a strong presence globally
with operations in 117 countries and approximately
122,000 employees globally (117,000 domestic and
5,000 international).1 Although Tyson has operations
abroad, the company is primarily domiciled in the United
States. This presents great opportunity for expansion as
increased global consumption of meat products could
generate growth in company revenue and increase the
market share.
Threats
Private Label Substitutes – Historically, it was common
for consumers to purchase brand name goods during
economic expansion and shift to private, store labels
during economic downturn. However, following the
15
recession of 2008, the quality of private labels has
increased substantially causing goods in the staples
sector to be much less cyclical than before.41 Tyson Foods
still benefits from strong brand recognition associated
with the quality of their products, but Tyson might
continue to be vulnerable to increased levels of
competition from private labels who want to compete on
price.
Price Fixing Lawsuit – After being investigated by the SEC
just last year, Tyson is subject to another price fixing
allegation in the chicken market from Sysco and U.S.
Foods.42 If Tyson is found guilty of restricting supply and
fixing price, this could negatively impact Tyson’s bottom
line and their brand image to consumers, which is one of
Tyson’s key strengths when comparing their company to
its competitors.
Pork is typically Tyson’s most volatile revenue stream.
Pork demand for 2017 was strong and was up 140,000
tons in 20171. High consumer demand coupled with a
weak U.S. dollar helps companies like Tyson Foods keep
their operating margins low and earn higher profits.
Good financial results in their pork revenue stream in
2018 could translate positively to the bottom line and
help make management’s goal of 7% revenue growth
attainable.
Tyson sits well positioned for growth in some of the
latent markets that exist in the organic and BFY healthy
foods industry. Tyson has put a lot of money towards
researching and investing in products that will offer their
company new revenues streams.13,14 Being able to
capitalize on this investment should positively impact
financial performance.
Many of their inputs, such as beef, chicken, and raw
materials associated with raising their products (corn
and soybean meal), are expected to experience a price
increase in 2018 and beyond. This points towards higher
costs of raising their vertically integrated products and
lower margins.
Historically, Tyson’s most consistent segment has been
their chicken operations and much of their brand
recognition has been built because of this segment’s
success. However, the reported revenue growth in
recent years indicate that Tyson’s competitors in this
industry, JBS SA and Pilgrim’s Pride, have outpaced Tyson
and sit better positioned for growth in the future than
Tyson.32,33 If Tyson Foods loses market share in the
chicken industry while some of their other revenue
streams are declining due to changing consumer
preferences, Tyson’s bottom line and shareholder
returns could be negatively impacted.
Tyson’s management seems extremely interested in
using the $300 million savings from the reduced federal
tax law on capital expenditures and acquiring ownership
of new business segments.15 However, with the
acquisitions of pizza crust companies, steam oven
technology, and animal cell technology, it seems that
Tyson’s management is going through an identity crisis
over what type of products that they want their portfolio
to offer. We strongly believe that Tyson will continue to
be a leader in the meats industry over the long run.
However, the acquisition of many companies that are
outside of their traditional expertise has potential to
trigger poor returns for shareholders if they can’t realize
any financial gains on these transactions.
The Trump presidency poses a large threat to the US’s
international trade agreements and may cause the
agricultural industry to lose business in foreign markets.
If the proposed 15% tariffs on U.S. agricultural products
like pork and chicken to China are realized, this could
detrimentally impact Tyson’s bottom line. However,
there is too much uncertainty associated with this
geopolitical event to accurately predict the likely
outcome with these tariffs, so this point didn’t heavily
influence our thesis or intrinsic value.
The Federal Reserve has already raised interest rates
once this year. With Tyson current debt schedule and
looking to finance M&A transactions with debt, rising
interest rates could impact Tyson’s future plans
significantly given their current capital structure.
The results of the second suit against Tyson for chicken
price fixing could play a big role in how consumers view
Tyson’s brand and their future chicken margins and
chicken revenue growth.
Investment Positives
Keys to Monitor
Investment Negatives
16
Revenue Decomposition We broke down Tyson’s revenue into its five reportable segments: beef, pork, chicken, prepared foods, and other. We then further broke down each segment into total sales, year over year growth, and percentage of net sales. We chose to break down revenue in this manner because of how Tyson reports revenue on their financial statements and how management projects revenue to grow in the future. To calculate our projections for revenue growth, we considered historical growth, projected meat consumption, and changing consumer preferences towards BFY healthy food options. Beef In the past decade, Tyson’s beef segment has grown at 3.1% on average each year. However, as we have indicated throughout the report, changing consumer preferences indicate that there will be a shift away from beef towards leaner white meats. Additionally, beef prices have been historically high and we predict them to continue to increase with the high levels of supply. So, we believe that Tyson will try to unload these input price increases onto consumers which could reduce sales volume if consumers primarily value price. Accordingly, we project Tyson’s beef segment to grow at 3% in 2018 and at 1.0% in the next 2-3 years. Pork Based on historical results, pork is traditionally Tyson’s most volatile segment line. On a positive note, pork demand was strong in 2017 with consumption being up 140,000 tons 1. However, pork is one of the fattier meats that Tyson offers, so we don’t anticipate it experiencing much revenue growth into the future based on consumer preferences. However, we do believe that Tyson will maintain a stronghold on their share of the pork market into the future just due to economies of scale. Based on these expectations, we projected sales growth to decline by 3% in 2018 and then stay constant with 0% revenue growth in the next 2-3 years. Chicken We view chicken as Tyson’s primary legacy business and believe that it will experience the most consistent revenue growth over the next few years. In their Q1 earnings call, management discussed that chicken overall had a good first quarter with high margins from historically low chicken prices and increased domestic sales volume. However, Tyson’s management, who has a
strong presence in China, also stated that sales volume internationally for their chicken segment did fall in quarter one, which can primarily be attributed to the potential for tariffs on exports to China. Based on these assumptions, we forecasted chicken sales to grow at 1.5% in 2018 and throughout the entire forecast horizon. Prepared Foods Tyson’s prepared foods segment is the revenue stream that has experienced the most revenue growth in the past decade. Fueled by the 2017 acquisitions of AdvancePierre and Philly Holdings, we predict that Tyson will experience high revenue growth in 2018 from increased sales volume and higher segment margins from the economies of scale. However, given the segments volatility & immaturity along with management’s unclear direction, it is hard to predict what revenue growth and sales volume will look like for this company past 2018. Based on these assumptions we project revenue in the prepared foods segment to grow by 6% in 2018 and continue to grow at 3% in the next 2-3 years. Other Tyson’s other segment line is composed of all other products that don’t fit into one of the above categories. Based on our previous analysis, this category has a lot of potential for growth as all the organic and BFY products that Tyson has invested in are classified in this revenue stream. However, some of Tyson’s more non-traditional acquisitions such as Tovala (steam ovens) and Bosco’s Pizza crusts make it hard to predict how much revenue growth this segment will be able to realize from these transactions. However, we projected revenue to grow at 15% in 2018 and continue to grow a 5% in the next 2-3 years. Continuing Value Growth Aggregating all our projections for Tyson’s individual segments, we estimated that Tyson’s growth in the continuing value year (2022) and beyond will be 1.4%. We believe this number is accurate because it encapsulates our opinion that Tyson has reached a point where there is minimal opportunity for growth given its current positions the meat industries and management’s current direction. This low CV growth rate can also be attributed to the maturity and decreasing cyclicality of the consumer staples sector. Cost of Goods Sold Based on the past five years, Tyson’s Cost of Goods Sold (COGS) was on average 88.4%, with operating margins
Valuation Analysis
17
growing by 6.72% from 2014. However, based on our predictions for how commodity prices will move in the future and some realized cost synergies in the next 2-3 years from their recent acquisitions, we forecasted Tyson’s COGS to decrease to 85.0% of revenue in 2018 and then move towards historical levels in the next 2-3 years back to 88.0% of revenue. Weighted Average Cost of Capital Cost of Equity We found the cost of equity by utilizing the Capital Asset Pricing Model (CAPM), which utilizes the risk-free rate, market risk premium, and company beta to estimate cost of equity. We utilized a 30 year T-Bond as a proxy for the risk free rate because it is a highly liquid asset and reflects the future expectations of the market; this led our risk free rate to be estimated at 3.07%. We used 4.20% for our equity market risk premium, which we felt was accurate because it was based on Aswath Damodaran’s equity risk premium research. We utilized Bloomberg to estimate Tyson’s beta to be .48, with their company r-squared value being .051. Using these inputs and the CAPM formula, we then calculated the cost of equity to be 5.09%. Cost of Debt To calculate our cost of debt, we utilized the pre-tax cost of debt from Tyson debt and the margin tax rate. We utilized the yield on a 30-year Tyson Bond (matures in 2047) as a proxy for the pre-tax cost of debt, which totaled to 4.59%. Our marginal tax rate of 23.5% was calculated by adding the federal income tax rate, state income taxes, foreign rate differences, and valuation rate allowances. We also made the adjustment on the new federal income tax rate with the new tax laws and included guidance from management based on how what they believe their compound tax rate will come out to in 2018 and in the coming years. Then based on those inputs, we calculated the after-tax cost of debt to be 3.51%. Weighted Average Cost of Capital (WACC) After calculating the cost of debt and cost of equity, we then calculated the market value of equity and market value of debt. To find the value of equity, we multiplied the number of shares outstanding by the market share prices. To estimate the value of debt, we added the book value of short term debt, long term debt, and the present value of operating leases. We then calculated Tyson’s capital structure to be 67.6% equity and 32.4% debt.
After finding this capital structure, we multiplied the market value by its corresponding cost and added them together. The result yielded us a 4.58% rate for our WACC. Discounted Cash Flow & Economic Profit Models The discounted cash flow (DCF) and economic profit (EP) models utilize the key value drivers of net operating profit less adjust taxes (NOPLAT) and invested capital (IC). Using these two value drivers, we then calculated free cash flow and economic profit, respective to each model, and discounted both by the WACC to the current year to calculate the value of the assets. We then made an adjustment to the value of operating assets by adding back non-operating assets and subtracting non-operating liabilities to reach a value of equity. Then, we took the value of equity and divided it by the number of shares outstanding to calculate the intrinsic value of Tyson. After moving the price forward for the partial year adjustment, we calculated Tyson’s intrinsic price to be $70.04. This intrinsic value yields that Tyson’s current price is overvalued by 1.75%. We believe that the DCF and EP models provide the most accurate price for Tyson’s intrinsic value because Tyson’s uses the same method for its valuation purposes. We also believe that this valuation technique best encompasses our projections on how commodity pricing will impact margins and how consumer preferences will impact revenue growth in the next few years. Discounted Dividend Model After moving the price forward for the partial year adjustment, the dividend discount model (DDM) provided us with an intrinsic stock price of $68.18. Compared to the current price for Tyson’s security, the DDM suggests that Tyson’s price is overvalued by 4.36%. This model assumes that Tyson’s dividend yield is 1.3%, and we projected that to stay constant in continuing value. However, the 43 securities in the food products industry have a dividend yield of 2.46%. Therefore, based on the industry average, we believe that even though the discount dividend model yields a similar price to our DCF/EP model, it is not a reliable measure of Tyson’s intrinsic value due to the low dividend yield compared to TSN’s competitors. Relative Price/Earnings Model Our relative valuation model consists of 11 comparable companies within the food products industry, with three
18
of them being direct competitors in the meat markets with Tyson foods.
Source: Yahoo Finance and Company 10ks We chose some of these companies, such as Hershey and Campbell’s, because they have similar brand recognition to Tyson and hold a similar share of the market within their individual specialized product line. We also selected some of these companies because they have similar market capitalizations (Tyson has a 25.99 billion market cap46) and similar dividend yields (Tyson has a dividend yield of 1.30%). Additionally, three of the companies that directly compete with Tyson in the meat markets were selected due to their similar operational products, despite being less mature having lower market capitalization. Based on these comparable companies, our relative valuation model yielded Tyson’s intrinsic price, according to 2018 P/E to be $75.23, which denotes that Tyson’s security is undervalued by 7.23%. However, since Pilgrim’s Pride has uncharacteristically low P/E’s compared to the other companies in the meat market, we also calculated a target price range excluding the Pilgrim’s Pride earnings. Excluding Pilgrim’s Pride, our relative valuation model yielded Tyson’s intrinsic price to be between $78.89 based on 2018 P/E, which finds Tyson’s security to be undervalued by 12.46% Out of the three valuation models that we used, we found the relative P/E model to be the worst predictor of Tyson’s intrinsic value. Since most of the companies within the meats industry are privately owned, our comparable companies were expanded to the general food products industry. Additionally, none of the companies that were included in the model have earnings’ estimates that coincide with what we predict for Tyson’s future financial performance. Therefore, after the first year of P/E valuation, the model was not accurate and yielded intrinsic values that indicated Tyson
was undervalued by 36.03%. So, we believe that this valuation method is not as reliable compared to DCF/EP mode. In summary, based on our DCF/EP and DDM models, we are recommending a SELL rating for Tyson Foods (NYSE:TSN) because of the limited growth opportunity we found with our intrinsic price.
Throughout our sensitivity analysis we searched for important factors that we, as analysts, recognized as imperative to the differentiation of valuation results. Equity Risk Premium/Beta We began our sensitivity analysis by changing our beta and our equity risk premium. In 2018, one of the greatest variations has been the volatility in the market. For comparison to the ever-changing environment, we tested our equity risk premium against our firm specific beta to determine how our intrinsic value could change based on varying market conditions. In our model, we forecasted our equity risk premium to be 4.20% calculated in class. We tested our equity risk premium by increasing and decreasing possible ERP points by .002%. This allowed us to gain a spread of intrinsic values in the range of our scenario analysis prices. For every .002% change, our price increased/decreased by an average of about $4.50. Our model’s beta was based on the raw beta calculation found through Bloomberg. We then tested our beta with increasing and decreasing increments of .04 because our team does not see beta increasing/moving towards the market beta of one due to a lack of historical volatility in TSN’s beta. For every increase/decrease of .04, our price varied by approximately $2.50. CV NOPLAT Growth/WACC Since any variance in weighted average cost of capital can shift the intrinsic value exponentially, we tested WACC in relation to the CV NOPLAT growth value. We purposefully made this data table with the intent of testing how the growth of an ROIC input would impact the intrinsic value in comparison to the cost of capital that Tyson Foods needed to obtain to bring value to their shareholders. We calculated our WACC to be 4.57% in the model and then increased and decreased WACC by .002%. We chose this interval based on our awareness of the possibility of a flattening yield curve. To this point, if
Sensitivity Analysis
19
we see an inversion in the yield curve, our WACC will decrease, increasing our stock price on a purely technical basis. In contrast, if the yield curve maintains its traditional higher yield for long-term debt, our intrinsic value will decrease. For every .2% change, our price increased/decreased by about $4.50. As for CV NOPLAT Growth, our model estimates that the aggregate of Tyson’s revenue streams will grow collectively at 2.0% into the future. Although it is standard to grow a company’s CV revenue by real GDP, we concluded that because of the maturity of Tyson’s industry and the lack of room for market share growth, TSN’s revenue would only sluggishly increase by 2.0%. For every .1% variation in CV NOPLAT growth, our price increased/decreased by about $2.80. COGS (% of Sales)/ SG&A (% of Sales) In 2018, we expect the volatility of Tyson’s operating expenses to be predominantly based on commodity pricing. The one commodity that we anticipate experiencing a decrease in price is chicken. With that in mind, we do not see this price decrease being a major advantage for Tyson Foods as their competitors have experienced greater revenue growth in the chicken market while Tyson has been distracted with/focused on growing other revenue segments. For every 1% change in COGS as a % of Sales, TSN’s intrinsic price varies by about $.90. As Tyson Foods continues to gain equity ownership in new businesses, Tyson will be forced to focus a larger share of revenue on SG&A costs related to rolling out new products into a new sales space. For this reason, we determined that testing SG&A as a percentage of sales would allow us to understand the results of how value would be impacted by Tyson choosing to invest a larger percentage of sales revenue towards these costs. For every .35% increase/decrease in SG&A expenses as a % of Sales, Tyson’s intrinsic value varied by about $1.20. Pre-Tax Cost of Debt/ Marginal Tax To determine how the reduction in federal income taxes from 35% to 21% would affect Tyson, we chose to analyze the marginal tax rate and pre-tax cost of debt. When testing the marginal tax rate, we began with our model’s calculated marginal tax rate of 23.5%. We then decreased the current rate, which included the federal tax rate deduction, by .025% at three different intervals. For these percent changes, our intrinsic value of Tyson varied by about $.20. However, we also tested how our
intrinsic value would look assuming that the 21% tax rate does not last over the long run. We tested our company’s value at a tax rate of 32% and 33%, which caused TSN’s intrinsic value to vary by $1.30. Our pre-tax cost of debt was found using TSN’s 30-year bond yield. We tested the variation in this yield to determine how a change in the yield of our corporate bonds would impact our valuation model. For every .25% change, our intrinsic value increased/decreased by $.20. Risk-Free Rate/CV ROIC Growth Since CV ROIC is used to compute the value of cash flows in perpetuity, small alterations of this assumption had a big impact on our valuation model. Specifically, we wanted to test how a change in ROIC, in comparison to the risk-free rate, would impact our model’s intrinsic price for TSN. For every .35% increase/decrease in the CV ROIC Growth rate, our value of TSN varied by $.70. As for the risk-free rate, we valued the importance of variation in this variable because of the recent volatility in the markets and the possibility of future rate hikes from the Federal Reserve. Our team specifically believes that we will see at least two more rate increases between now and the end of 2018. Accordingly, for every .25% variation in the risk-free rate, TSN’s price increased/decreased by $6.50-$7.00. Important Disclaimer This report was created by students enrolled in the
Applied Equity Valuation (FIN:4250) class at the
University 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.
20
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stake-memphis-meats
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21
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consumption-of-pork-in-the-us-since-2000/
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industry/statistics/u-s-broiler-production/
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https://www.mckinsey.com/business-
functions/strategy-and-corporate-finance/our-
insights/the-value-premium-of-organic-growth
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from http://ir.tyson.com/investor-relations/news-
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Tovala/default.aspx
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04241c66accdb63e6ebfa0.pdf
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https://finance.yahoo.com/news/2-more-lawsuits-
accuse-chicken-204826275.html
43. Tyson Invests in Bosco’s Pizza Co. Retrieved April
15th, 2018 from http://ir.tyson.com/investor-
relations/news-releases/news-releases-
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Pizza-Co/default.aspx
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sell_tyson_assets/ellinghuysen
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22
https://uk.finance.yahoo.com/news/why-tyson-foods-
tsn-9-075907014.html
46. https://finance.yahoo.com/quote/TSN/
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s/reports/Env_Am_Tyson_v4.pdf
Tyson Foods Inc.
Revenue Decomposition
In Millions Fiscal Years Ending Nov. 13 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022E
Beef
Total Sales 17,236.00 14,513.00 14,823.00 15,267.69 15,725.72 15,882.98 16,041.81 16,122.02
Year - Over - Year Growth 6.5% -15.8% 2.1% 3.0% 3.0% 1.0% 1.0% 0.5%
Percentage of Net Sales 41.7% 39.4% 38.7% 39.0% 39.3% 39.1% 38.8% 38.5%
Pork
Total Sales 5,262.00 4,909.00 5,238.00 5,080.86 4,979.24 4,979.24 4,979.24 4,979.24
Year - Over - Year Growth -16.5% -6.7% 6.7% -3.0% -2.0% 0.0% 0.0% 0.0%
Percentage of Net Sales 12.7% 13.3% 13.7% 13.0% 12.4% 12.2% 12.1% 11.9%
Chicken
Total Sales 11,390.00 10,927.00 11,409.00 11,580.14 11,753.84 11,930.14 12,109.10 12,290.73
Year - Over - Year Growth 2.5% -4.1% 4.4% 1.5% 1.5% 1.5% 1.5% 1.5%
Percentage of Net Sales 27.5% 29.6% 29.8% 29.6% 29.4% 29.3% 29.3% 29.3%
Prepared Foods
Total Sales 7,822.00 7,346.00 7,853.00 8,324.18 8,573.91 8,831.12 9,096.06 9,368.94
Year - Over - Year Growth 99.2% -6.1% 6.9% 6.0% 3.0% 3.0% 3.0% 3.0%
Percentage of Net Sales 18.9% 19.9% 20.5% 21.3% 21.4% 21.7% 22.0% 22.4%
International
Total Sales - - - - - - - -
Year - Over - Year Growth -100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Percentage of Net Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other
Total Sales 879.00 380.00 349.00 401.35 437.47 459.35 482.31 506.43
Year - Over - Year Growth 0.0% -56.8% -8.2% 15.0% 9.0% 5.0% 5.0% 5.0%
Percentage of Net Sales 2.1% 1.0% 0.9% 1.0% 1.1% 1.1% 1.2% 1.2%
Intersegment Sales
Total Sales (1,216.00) (1,194.00) (1,412.00) (1,482.60) (1,452.95) (1,431.15) (1,409.69) (1,388.54)
Year - Over - Year Growth -8.2% -1.8% 18.3% 5.0% -2.0% -1.5% -1.5% -1.5%Percentage of Net Sales -2.9% -3.2% -3.7% -3.8% -3.6% -3.5% -3.4% -3.3%
Total 41,373.00$ 36,881.00$ 38,260.00$ 39,171.62$ 40,017.23$ 40,651.68$ 41,298.83$ 41,878.82$
Year - Over - Year Growth 10.1% -10.9% 3.7% 2.38% 2.16% 1.59% 1.59% 1.40%
Tyson Foods Inc.
Income Statement
In Millions Fiscal Years Ending Nov. 13 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022E
Sales 41,373.0 36,881.0 38,260.0 39,171.6 40,017.2 40,651.7 41,298.8 41,878.8
Cost of sales 36,745.0 31,479.0 32,416.0 33,295.9 34,815.0 35,773.5 36,343.0 36,560.2
Gross profit 4,628.0 5,402.0 5,844.0 5,875.7 5,202.2 4,878.2 4,955.9 5,318.6
Depreciation 609.0 617.0 642.0 668.2 698.4 730.0 763.0 797.5
Amortization 102.0 88.0 119.0 124.9 122.4 89.9 88.6 87.3
Goodwill - - - - - - - -
Selling, general & administrative expenses 1,748.0 1,864.0 2,152.0 2,350.3 2,521.1 2,683.0 2,725.7 2,847.8
Operating Income (loss) 2,169.0 2,833.0 2,931.0 2,732.4 1,860.4 1,375.3 1,378.6 1,586.1
Other Income (Expense):
Interest income 9.0 6.0 7.0 7.3 7.5 7.7 8.0 8.2
Interest expense (293.0) (249.0) (279.0) (468.3) (469.6) (509.0) (501.1) (455.3)
Other, net 36.0 8.0 (31.0) - - - - -
Income before Income Taxes 1,921.0 2,598.0 2,628.0 2,271.4 1,398.3 874.0 885.4 1,139.0
Income Tax Expense 697.0 826.0 850.0 533.77 328.60 205.39 208.07 267.67
Minority Interest and Discontinued Operations - - - - - - - -
Net Income (Loss) 1,224.0 1,772.0 1,778.0 1,737.6 1,069.7 668.6 677.3 871.3
Less: Net Income (loss) Attributable to Noncontrolling Interest (4.0) (4.0) (4.0) - - - - -
Net Income (Loss) Attributable to Tyson 1,220.0 1,768.0 1,774.0 1,737.6 1,069.7 668.6 677.3 871.3
Weighted Average Shares Outstanding:
Class A Basic 335 315 296 291 280 271 262 253
Class B Basic 70 70 70 70 70 70 70 70
Net Income Per Share Attributable to Tyson:
Class A Basic $ 3.06 $ 4.67 $ 4.94 $ 4.92 $ 3.12 $ 2.00 $ 2.09 $ 2.76
Class B Basic $ 2.79 $ 4.24 $ 4.45 $ 4.67 $ 2.96 $ 1.90 $ 1.98 $ 2.62
Dividends Declared Per Share:
Class A $ 0.425 $ 0.650 $ 0.975 $ 1.14 $ 1.30 $ 1.46 $ 1.62 $ 1.78
Class B $ 0.383 $ 0.585 $ 0.878 $ 1.03 $ 1.17 $ 1.32 $ 1.47 $ 1.61
Tyson Foods Inc.
Common Size Income Statement
In Millions Fiscal Years Ending Nov. 13 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022E
Sales 100% 100% 100% 100% 100% 100% 100% 100%
Cost of sales 88.81% 85.35% 84.73% 85.00% 87.00% 88.00% 88.00% 87.30%
Gross profit 11.19% 14.65% 15.27% 15.00% 13.00% 12.00% 12.00% 12.70%
Depreciation 1.47% 1.67% 1.68% 1.71% 1.75% 1.80% 1.85% 1.90%
Amortization 0.25% 0.24% 0.31% 0.32% 0.31% 0.22% 0.21% 0.21%
Selling, general & administrative expenses 4.22% 5.05% 5.62% 6.00% 6.30% 6.60% 6.60% 6.80%
Operating Income (loss) 5.24% 7.68% 7.66% 6.98% 4.65% 3.38% 3.34% 3.79%
Other Income (Expense): 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Interest income 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02%
Interest expense -0.71% -0.68% -0.73% -1.20% -1.17% -1.25% -1.21% -1.09%
Other, net 0.09% 0.02% -0.08% 0.00% -1.17% -1.25% -1.21% -1.09%
Total other income (expense) 5.23% 8.25% 8.11% 6.82% 4.02% 2.44% 2.44% 3.12%
Income before Income Taxes 4.64% 7.04% 6.87% 5.80% 3.49% 2.15% 2.14% 2.72%
Federal income tax expense (benefit) 1.36% 1.93% 1.97% 0.00% 0.00% 0.00% 0.00% 0.00%
State income tax expense (benefit) 0.22% 0.32% 0.21% 0.00% 0.00% 0.00% 0.00% 0.00%
Foreign income tax expense (benefit) 0.11% -0.01% 0.04% 0.00% 0.00% 0.00% 0.00% 0.00%
Income Tax Expense 1.68% 2.24% 2.22% 1.36% 0.82% 0.51% 0.50% 0.64%
Net Income (Loss) 2.96% 4.80% 4.65% 4.44% 2.67% 1.64% 1.64% 2.08%
Less: Net Income (loss) Attributable to Noncontrolling Interest -0.01% -0.01% -0.01% 0.00% 0.00% 0.00% 0.00% 0.00%
Net Income (Loss) Attributable to Tyson 2.95% 4.79% 4.64% 4.44% 2.67% 1.64% 1.64% 2.08%
Tyson Foods Inc.
Balance Sheet
In Millions Fiscal Years Ending Nov. 13 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022E
Assets
Current Assets:
Cash & cash equivalents 688.0 349.0 318.0 36.5 249.7 (1,041.7) (3,003.7) (3,293.7)
Accounts receivable, net 1,620.0 1,542.0 1,675.0 1,714.9 1,952.0 2,186.2 2,221.0 2,252.2
Inventories 2,878.0 2,732.0 3,239.0 3,316.2 3,387.8 3,441.5 3,496.3 3,545.4
Other current assets 195.0 265.0 1,026.0 1,566.9 1,600.7 1,626.1 1,652.0 1,675.2
Total current assets 5,381.0 4,888.0 6,258.0 6,634.4 7,190.2 6,212.1 4,365.5 4,179.0
Net property, plant & equipment 5,176.0 5,170.0 5,568.0 5,819.8 6,083.0 6,358.1 6,645.7 6,946.2
Goodwill 6,667.0 6,669.0 9,324.0 9,324.0 9,324.0 9,324.0 9,324.0 9,324.0
Intangible assets 5,168.0 5,084.0 6,243.0 6,118.1 5,995.8 5,905.8 5,817.3 5,730.0
Other assets 612.0 562.0 673.0 686.5 700.2 714.2 728.5 743.0
Total assets 23,004.0 22,373.0 28,066.0 28,582.9 29,293.2 28,514.3 26,881.0 26,922.3
Liabilities and Shareholders' Equity:
Current Liabilities:
Current debt 715.0 79.0 906.0 906.0 1,737.0 1,537.0 511.0 1,007.0
Accounts payable 1,662.0 1,511.0 1,698.0 1,658.09 1,693.88 1,720.74 1,748.13 1,772.68
Other current liabilities 1,158.0 1,172.0 1,424.0 1,457.9 1,489.4 1,513.0 1,537.1 1,558.7
Liabilities held for sale - - 4.0 4.0 4.0 4.0 4.0 4.0
Total Current Liabilities 3,535.0 2,762.0 4,032.0 4,026.0 4,924.3 4,774.8 3,800.2 4,342.4
Long-Term Debt, Less Current Maturities 6,010.0 6,200.0 9,297.0 9,324.89 9,352.87 9,380.92 9,409.07 9,437.29
Deferred Income Taxes 2,449.0 2,545.0 2,979.0 2,919.4 2,861.0 2,803.8 2,747.7 2,692.8
Other Liabilities 1,304.0 1,242.0 1,199.0 1,223.0 1,247.4 1,272.4 1,297.8 1,323.8
Total Liabilities 13,298.0 12,749.0 17,507.0 17,493.3 18,385.6 18,231.9 17,254.9 17,796.2
Shareholders' Equity:
Common Equity 4,349.0 4,398.0 4,423.0 4,459.05 4,494.09 4,528.16 4,561.33 4,593.64
Retained earnings 6,813.0 8,348.0 9,776.0 11,112.1 11,736.7 11,919.0 12,071.1 12,380.4
Accumulated comprehensive income (loss) (90.0) (45.0) 16.0 16.0 16.0 16.0 16.0 16.0
Less treasury stock, at cost (Note 4) 1,381.0 3,093.0 3,674.0 4,515.6 5,357.2 6,198.8 7,040.4 7,882.0
Total Tyson Shareholders' Equity 9,691.0 9,608.0 10,541.0 11,071.6 10,889.6 10,264.4 9,608.1 9,108.0
Noncontrolling Interests 15.0 16.0 18.0 18.0 18.0 18.0 18.0 18.0
Total Shareholders' Equity 9,706.0 9,624.0 10,559.0 11,089.6 10,907.6 10,282.4 9,626.1 9,126.0
Total Liabilities and Shareholders' Equity 23,004.0 22,373.0 28,066.0 28,582.9 29,293.2 28,514.3 26,881.0 26,922.3
Tyson Foods Inc.
Common Size Balance Sheet
In Millions Fiscal Years Ending Nov. 13 2015 2016 2017 2018E 2019E 2020E 2021E CV 2022E
Assets
Current Assets:
Cash & cash equivalents 1.66% 0.95% 0.83% 0.09% 0.62% -2.56% -7.27% -7.86%
Accounts receivable, net 3.92% 4.18% 4.38% 4.38% 4.88% 5.38% 5.38% 5.38%
Inventories 6.96% 7.41% 8.47% 8.47% 8.47% 8.47% 8.47% 8.47%
Other current assets 0.47% 0.72% 2.68% 4.00% 4.00% 4.00% 4.00% 4.00%
Total current assets 13.01% 13.25% 16.36% 16.94% 17.97% 15.28% 10.57% 9.98%
Net property, plant & equipment 12.51% 14.02% 14.55% 14.86% 15.20% 15.64% 16.09% 16.59%
Goodwill 16.11% 18.08% 24.37% 23.80% 23.30% 22.94% 22.58% 22.26%
Intangible assets 12.49% 13.78% 16.32% 15.62% 14.98% 14.53% 14.09% 13.68%
Other assets 1.48% 1.52% 1.76% 1.75% 1.75% 1.76% 1.76% 1.77%
Total assets 55.60% 60.66% 73.36% 72.97% 73.20% 70.14% 65.09% 64.29%
Liabilities and Shareholders' Equity:
Current Liabilities:
Current debt 1.73% 0.21% 2.37% 2.31% 4.34% 3.78% 1.24% 2.40%
Accounts payable 4.02% 4.10% 4.44% 4.23% 4.23% 4.23% 4.23% 4.23%
Other current liabilities 2.80% 3.18% 3.72% 3.72% 3.72% 3.72% 3.72% 3.72%
Liabilities held for sale 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%
Total Current Liabilities 8.54% 7.49% 10.54% 10.28% 12.31% 11.75% 9.20% 10.37%
Long-Term Debt 14.53% 16.81% 24.30% 23.81% 23.37% 23.08% 22.78% 22.53%
Deferred Income Taxes 5.92% 6.90% 7.79% 7.45% 7.15% 6.90% 6.65% 6.43%
Other Liabilities 3.15% 3.37% 3.13% 3.12% 3.12% 3.13% 3.14% 3.16%
Shareholders' Equity: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Common Stock ($0.10 par value): 10.51% 11.92% 11.56% 11.38% 11.23% 11.14% 11.04% 10.97%
Retained earnings 16.47% 22.63% 25.55% 28.37% 29.33% 29.32% 29.23% 29.56%
Accumulated comprehensive income (loss) -0.22% -0.12% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04%
Less treasury stock, at cost (Note 4) 3.34% 8.39% 9.60% 11.53% 13.39% 15.25% 17.05% 18.82%
Total Tyson Shareholders' Equity 23.42% 26.05% 27.55% 28.26% 27.21% 25.25% 23.26% 21.75%
Noncontrolling Interests 0.04% 0.04% 0.05% 0.05% 0.04% 0.04% 0.04% 0.04%
Total Shareholders' Equity 23.46% 26.09% 27.60% 28.31% 27.26% 25.29% 23.31% 21.79%
Total Liabilities and Shareholders' Equity 55.60% 60.66% 73.36% 72.97% 73.20% 70.14% 65.09% 64.29%
Tyson Foods Inc.
Cash Flow Statement
In Millions Fiscal Years Ending Nov. 13 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Net income (loss) 86.00$ (537.00)$ 765.00$ 733.00$ 576.00$ 778.00$ 856.00$ 1,224.00$ 1,772.00$ 1,778.00$
Depreciation 468.00$ 445.00$ 416.00$ 433.00$ 443.00$ 474.00$ 494.00$ 609.00$ 617.00$ 642.00$
Amortization 25.00$ 51.00$ 81.00$ 73.00$ 56.00$ 45.00$ 36.00$ 102.00$ 88.00$ 119.00$
Deferred income taxes 35.00$ (26.00)$ 18.00$ 86.00$ 140.00$ (12.00)$ (105.00)$ 38.00$ 84.00$ (39.00)$
Convertible debt discount -$ -$ -$ -$ -$ -$ (92.00)$ -$ -$ -$
Gain on disposition of businesses -$ -$ -$ -$ -$ -$ -$ (177.00)$ -$ -$
Impairment of assets 57.00$ 32.00$ 36.00$ 18.00$ 34.00$ 74.00$ 107.00$ 285.00$ 45.00$ 214.00$
Share-based compensation expense -$ -$ -$ -$ -$ -$ -$ 69.00$ 81.00$ 92.00$
Other, net 26.00$ 68.00$ 76.00$ 49.00$ 18.00$ 26.00$ 31.00$ 71.00$ (34.00)$ (57.00)$
Change in accounts receivable (59.00)$ 137.00$ (79.00)$ (114.00)$ (69.00)$ (126.00)$ (93.00)$ 66.00$ 73.00$ (55.00)$
Inventories (376.00)$ 493.00$ (239.00)$ (299.00)$ (259.00)$ 15.00$ (148.00)$ 220.00$ 148.00$ (246.00)$
Accounts payable 98.00$ (148.00)$ 101.00$ 152.00$ 106.00$ (12.00)$ 202.00$ (162.00)$ (130.00)$ 61.00$
Income taxes payable/receivable (22.00)$ 33.00$ (53.00)$ (73.00)$ 8.00$ 80.00$ (133.00)$ 177.00$ (19.00)$ 55.00$
Interest payable -$ (60.00)$ (4.00)$ 19.00$ 5.00$ (1.00)$ 5.00$ (23.00)$ (1.00)$ 16.00$
Other current assets & liabilities (50.00)$ (23.00)$ 285.00$ (31.00)$ (38.00)$ (27.00)$ 18.00$ 71.00$ (8.00)$ 19.00$
Net Cash Flows from Operating Activities 288.00$ 1,025.00$ 1,432.00$ 1,046.00$ 1,187.00$ 1,314.00$ 1,178.00$ 2,570.00$ 2,716.00$ 2,599.00$
Cash Flows from Investing Activities:
Additions to property, plant & equipment (425.00)$ (368.00)$ (550.00)$ (643.00)$ (690.00)$ (558.00)$ (632.00)$ (854.00)$ (695.00)$ (1,069.00)$
Proceeds from sales of property, plant & equipment 26.00$ 9.00$ - - - - - - - -
Purchases of marketable securities (115.00)$ (37.00)$ (53.00)$ (146.00)$ (58.00)$ (135.00)$ (18.00)$ (38.00)$ (46.00)$ (79.00)$
Proceeds from sale of marketable securities 112.00$ 56.00$ 49.00$ 66.00$ 47.00$ 117.00$ 33.00$ 52.00$ 37.00$ 61.00$
Acquisitions and Dispositonns, net of cash acquired - (93.00)$ -$ -$ - (106.00)$ (8,193.00)$ 539.00$ - (3,081.00)$
Other investing activities, net (19.00)$ (41.00)$ 11.00$ 28.00$ 41.00$ 39.00$ 10.00$ 31.00$ 20.00$ 4.00$
Net Cash Flows Used for Investing Activities (399.00)$ (427.00)$ (500.00)$ (644.00)$ (660.00)$ (643.00)$ (8,800.00)$ (270.00)$ (684.00)$ (4,164.00)$
Cash Flows from Financing Activities:
Payments of debt (147.00)$ (380.00)$ (1,034.00)$ (500.00)$ (993.00)$ (91.00)$ (639.00)$ (1,995.00)$ (714.00)$ (3,159.00)$
Proceeds from issuance of long-term debt - - - - - - 5,576.00$ 501.00$ 1.00$ 5,444.00$
Borrowings and Payments on revolving credit facility (213.00)$ 15.00$ - - - - - -$ 300.00$ (300.00)$
Proceeds from issuance of commercial paper - - - - - - - - - 8,138.00$
Repayments of commercial paper - - - - - - - - - (7,360.00)$
Payment of AdvancePierre TRA liability - - - - - - - - - (223.00)$
Purchases of Tyson class A common stock (30.00)$ (19.00)$ (48.00)$ (207.00)$ (264.00)$ (614.00)$ (295.00)$ (495.00)$ (1,944.00)$ (860.00)$
Dividends (56.00)$ (60.00)$ (59.00)$ (59.00)$ (57.00)$ (104.00)$ (104.00)$ (147.00)$ (216.00)$ (319.00)$
Stock options exercised 9.00$ 1.00$ - - - 123.00$ 67.00$ 84.00$ 128.00$ 154.00$
Other, net 129.00$ (60.00)$ 42.00$ 68.00$ 27.00$ 18.00$ (23.00)$ 17.00$ 68.00$ 15.00$
Net cash flows from financing activities 321.00$ 150.00$ (959.00)$ (658.00)$ (171.00)$ (600.00)$ 6,915.00$ (2,035.00)$ (2,377.00)$ 1,530.00$
Effect of exchange rate change on cash (2.00)$ 6.00$ 1.00$ (6.00)$ (1.00)$ 3.00$ - (15.00)$ 6.00$ 4.00$
Increase (decrease) in cash & cash equivalents 208.00$ 754.00$ (26.00)$ (262.00)$ 355.00$ 74.00$ (707.00)$ 250.00$ (339.00)$ (31.00)$
Cash & cash equivalents at beginning of year 42.00$ 250.00$ 1,004.00$ 978.00$ 716.00$ 1,071.00$ 1,145.00$ 438.00$ 688.00$ 349.00$
Cash & cash equivalents at end of year 250.00$ 1,004.00$ 978.00$ 716.00$ 1,071.00$ 1,145.00$ 438.00$ 688.00$ 349.00$ 318.00$
Tyson Foods Inc.
Cash Flow Statement
In Millions Fiscal Years Ending Nov. 13 2018E 2019E 2020E 2021E CV 2022E
Cash Flows from Operating Activities:
Net income (loss) 1,737.6 1,069.7 668.6 677.3 871.3
Depreciation 668.2 698.4 730.0 763.0 797.5
Amortization 124.9 122.4 89.9 88.6 87.3
Change in Deferred income taxes (59.6) (58.4) (57.2) (56.1) (55.0)
Change in Accounts Payable (39.9) 35.8 26.9 27.4 24.6
Change in Other Current Liabilities 33.9 31.5 23.6 24.1 21.6
Change in Accounts Receivable (39.9) (237.1) (234.2) (34.8) (31.2)
Change in Inventories (77.2) (71.6) (53.7) (54.8) (49.1)
Change in Other Current Assets (540.9) (33.8) (25.4) (25.9) (23.2)
Net Cash Flows from Operating Activities 1,807.10 1,556.80 1,168.46 1,408.84 1,643.77
Cash Flows from Investing Activities:
Capital Expenditures (920.0) (961.6) (1,005.1) (1,050.5) (1,098.0)
Change in Other Assets (13.5) (13.7) (14.0) (14.3) (14.6)
Net Cash Flows Used for Investing Activities (933.4) (975.3) (1,019.1) (1,064.8) (1,112.6)
Cash Flows from Financing Activities:
Change in Current Debt - 831.0 (200.0) (1,026.0) 496.0
Changes in Treasury Stock (841.60)$ (841.60)$ (841.60)$ (841.60)$ (841.60)$
Proceeds From Issuance of Long-term Debt 27.9 28.0 28.1 28.1 28.2
Change in Other Liabilities 24.0 24.5 24.9 25.4 26.0
Payment of Dividends (401.5) (445.1) (486.3) (525.2) (562.1)
Proceeds from Issuance of Common Equity 36.1 35.0 34.1 33.2 32.3
Net cash flows from financing activities (1,155.2) (368.2) (1,440.8) (2,306.0) (821.2)
Increase (decrease) in cash & cash equivalents (281.5) 213.2 (1,291.4) (1,962.0) (290.0)
Cash & cash equivalents at beginning of year 318.0 36.5 249.7 (1,041.7) (3,003.7)
Cash & cash equivalents at end of year 36.5 249.7 (1,041.7) (3,003.7) (3,293.7)
Tyson Foods Inc.
Value Driver Estimation
In Millions Fiscal Years Ending Nov. 13 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
NOPLAT 1388.64 2018.18 2411.55 2000.68 1328.20 921.28 918.52 1071.44
Sales 41,373.00 36,881.00 38,260.00 39,171.62 40,017.23 40,651.68 41,298.83 41,878.82
Cost of Goods Sold 36,745.00 31,479.00 32,416.00 33,295.87 34,814.99 35,773.48 36,342.97 36,560.21
SGA 1,748.00 1,864.00 2,152.00 2,350.30 2,521.09 2,683.01 2,725.72 2,847.76
Amortization 102.00 88.00 119.00 119.00 119.00 119.00 119.00 119.00
Depreciation 609.00 617.00 642.00 668.16 698.38 729.96 762.98 797.48
Implied Interest on Operating Leases 19.49 23.96 26.11 29.08 32.38 36.06 40.16 44.73
EBITA 2,149.51 2,809.04 2,904.89 2,709.21 1,831.40 1,310.17 1,308.00 1,509.64
Income Tax Provision 697.00 826.00 850.00 533.77 328.60 205.39 208.07 267.67
+Tax Shield on Interest Expense 68.86 58.52 65.57 110.05 110.36 119.62 117.77 107.00
-Tax on Interest (or Investment Income) 2.12 1.41 1.65 1.71 1.76 1.82 1.87 1.93
+Tax Shield on Interest on Operating Leases 4.58 5.63 6.14 6.83 7.61 8.47 9.44 10.51
Less: Adjusted Taxes 759.86 886.86 927.34 648.95 444.81 331.67 333.40 383.25
Deffered Tax Liability 2449.00 2545.00 2979.00 2919.42 2861.03 2803.81 2747.73 2692.78
-Previous Year Defered Tax Liability 2450.00 2449.00 2545.00 2979.00 2919.42 2861.03 2803.81 2747.73
Plus: Deferred Taxes -1.00 96.00 434.00 -59.58 -58.39 -57.22 -56.08 -54.95
Invested Capital (IC) 12342.75 12302.40 15035.27 15850.03 16290.31 16761.50 17048.82 17344.30
Operating Current Assets: 5086.04 4889.37 6303.47 6970.08 7320.63 7639.96 7761.58 7870.58
Normal Cash 393.04 350.37 363.47 372.13 380.16 386.19 392.34 397.85
Accounts Receivable 1620.00 1542.00 1675.00 1714.91 1952.02 2186.22 2221.03 2252.22
Inventories 2878.00 2732.00 3239.00 3316.18 3387.76 3441.47 3496.26 3545.36
Other Current Assets 195.00 265.00 1026.00 1566.86 1600.69 1626.07 1651.95 1675.15
Operating Current Liabilities 2820.00 2683.00 3122.00 3116.02 3183.28 3233.75 3285.23 3331.37
Accounts Payable 1662.00 1511.00 1698.00 1658.09 1693.88 1720.74 1748.13 1772.68
Other accrued expenses & liabilities 1158.00 1172.00 1424.00 1457.93 1489.40 1513.02 1537.10 1558.69
Operating Working Capital 2266.04 2206.37 3181.47 3854.06 4137.35 4406.20 4476.35 4539.21
Plus: Net PPE 5176.00 5170.00 5568.00 5819.82 6083.02 6358.13 6645.69 6946.24
Plus: PV of Operating Leases 424.71 522.03 568.80 594.53 621.41 649.52 678.89 709.60
Intangible Assets 5168.00 5084.00 6243.00 6118.14 5995.78 5905.84 5817.25 5729.99
Other Assets 612.00 562.00 673.00 686.46 700.19 714.19 728.48 743.05
Plus: Other Long-Term Operating Assets 5780.00 5646.00 6916.00 6804.60 6695.97 6620.03 6545.73 6473.04
Less: Other Long-Term Operating Liabilities 1304.00 1242.00 1199.00 1222.98 1247.44 1272.39 1297.84 1323.79
ROIC (NOPLAT / Beginning Invested Capital) 10.49% 16.35% 19.60% 13.31% 8.38% 5.66% 5.48% 6.28%
EP (NOPLAT - (Beginning Invested Capital *
WACC)) 1388.64 2018.18 2411.55 1312.97 603.23 176.17 151.86 291.64
FCF (NOPLAT - ∆ Invested Capital) 2288.09 2058.53 -321.32 1185.92 887.91 450.09 631.20 775.96
Tyson Foods Inc.
Weighted Average Cost of Capital (WACC) Estimation
Cost of Equity
Risk-Free Rate 3.07%
Risk Premium 4.20%
Beta 0.48
Cost of Equity 5.09%
Cost of Debt
Pre-Tax Cost of Debt 4.57%
2018 Marginal Tax Rate 23.50%
After-Tax Cost of Debt 3.50%
Value of Equity
Share Price $71.29
Shares Outstanding 359
Value of Equity 25,593$
Value of Debt
BV of Short-Term Debt 906
BV of Long-Term Debt 9297
PV of Operating Leases 569
Value of Debt 10,772$
Weights
Equity 67.48%
Debt 32.52%
WACC Calculation
Cost of Equity 5.09%
Weight of Equity 67.48%
After-Tax cost of Debt 3.51%
Weight of Debt 32.52%
WACC 4.57%
Tyson Foods Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 2.00%
CV ROIC 12.22%
WACC 4.57%
Cost of Equity 5.09%
Fiscal Years Ending Nov. 13 2018E 2019E 2020E 2021E 2022CV
DCF Model
NOPLAT 2,000.68 1,328.20 921.28 918.52 1,071.44
∆ Invested Capital 814.76 440.29 471.19 287.32 295.48
Free Cash Flow 1,185.92 887.91 450.09 631.20 775.96
Continuing Value 34,813.63
Future Cash Flow 1,185.92 887.91 450.09 631.20 34,813.63
Discount Periods 1 2 3 4 4
Discounted Cash Flow 1134.05 811.94 393.58 527.81 29110.88
Value of Operating Assets 31,978.25
Excess Cash 2,226.00
Marketable Securities 673.00
Current Debt (906.00)
Long-Term Debt (9,297.00)
Other Liablilities (1,199.00)
PV of Op Leases (709.60)
ESOP (260.98)
Underfunded Retirement Liabilities (195.00)
Lawsuits (12.60)
Non-controlling interest (18.00)
Liabilities held for sale (4.00)
Value of Equity 22,275.07
Shares Outstanding 323
Partial Year Adjusted Intrinsic Stock Price 70.04$
EP Model
Economic Profit 1,312.97 603.23 176.17 151.86 291.64
Continuing Value 17,764.81
Future Cash Flows 1,312.97 603.23 176.17 151.86 17,764.81
Discount Periods 1 2 3 4 4
PV of Cash Flows 1,255.54 551.61 154.05 126.98 14,854.79
PV of Economic Profit 16,942.98
Plus Beginning IC 15,035.27
Value of Operating Assets 31,978.25
Excess Cash 2,226.00
Marketable Securities 673.00
Current Debt (906.00)
Long-Term Debt (9,297.00)
Other Liablilities (1,199.00)
PV of Op Leases (709.60)
ESOP (260.98)
Underfunded Retirement Liabilities (195.00)
Lawsuits (12.60)
Non-controlling interest (18.00)
Liabilities held for sale (4.00)
Value of Equity 22,275.07
Shares Outstanding 323
Partial Year Adjusted Intrinsic Stock Price 70.04$
Tyson Foods Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Key Assumptions
CV growth 2.00%
CV ROE 9.55%
Cost of Equity 5.09%
Fiscal Years Ending Sep. 30 2018E 2019E 2020E 2021E 2022CV
EPS A $ 4.92 $ 3.12 $ 2.00 $ 2.09 $ 2.76
Future Cash Flows
P/E Multiple (CV Year) 25.62$
EPS (CV Year) 2.76$
Future Stock Price 70.62$
Dividends Per Share A 1.14$ 1.30$ 1.46$ 1.62$
Dividends Per Share B 1.03$ 1.17$ 1.32$ 1.47$
Future Cash Flows 2.16$ 2.47$ 2.77$ 3.08$
Discount Period 1 2 3 4 4
Discounted Cash Flows 2.06$ 2.23$ 2.39$ 2.53$ 57.91$
Partial Year Adjusted Intrinsic Stock Price 68.18$
Tyson Foods Inc.
Relative Valuation Models
EPS EPSTicker Company Price 2018E 2019E P/E 18 P/E 19
ADM Archer Daniels Midland $44.16 $2.91 $3.13 15.18 14.11
CAG ConAgra Brands $36.75 $2.05 $2.32 17.93 15.84
CPB Campbell Soup Company $42.83 $3.14 $3.28 13.64 13.06
GIS General Mills, Inc. $44.88 $3.08 $3.19 14.57 14.07
HRL Hormel Foods Corporation $35.35 $1.84 $1.93 19.21 18.32
HSY Hershey Company $96.63 $5.38 $5.71 17.96 16.92
K Kellogg Company $63.35 $4.44 $4.71 14.27 13.45 MKC McCormick & Company $106.59 $4.93 $5.39 21.62 19.78 PPC Pilgrim's Pride Corporation $23.86 $3.04 $3.05 7.85 7.82 SAFM Sanderson Farms, Inc. $113.15 $10.15 $9.54 11.15 11.86
SJM J.M. Smucker 123.57$ $8.24 $9.19 15.00 13.45
Average 15.31 14.42
Average w/o PPC 16.05 15.08
TSN Tyson Foods Inc. $71.29 $ 4.92 $ 2.76 $ 14.50 $ 25.86
Implied Relative Value:
P/E (EPS18) $ 75.23
P/E (EPS22) 39.77$
P/E w/o PPC (EPS18) $ 78.90
P/E w/o PPC (EPS22) 41.59$
Tyson Foods Inc.
Key Management Ratios
Fiscal Years Ending 2015 2016 2017 2018E 2019E 2020E 2021E 2022CV
Liquidity Ratios
Current Ratio = Current Assets / Current Liabilities 1.52 1.77 1.55 1.65 1.46 1.30 1.15 0.96
Quick Ratio = (Cash Equivalents + Accounts Receivables) / Current Liabilities 0.65 0.68 0.49 0.44 0.45 0.24 (0.21) (0.24)
Operating Cash Flow Ratio = Cash Flow from Operations / Current Liabilties 0.73 0.98 0.64 0.45 0.32 0.24 0.37 0.38
Activity or Asset-Management Ratios
Inventory Turnover = Cost of Goods Sold / Average Inventory 11.17 13.10 10.54 9.89 9.93 10.20 10.31 10.32
Inventory Period = 365 / Inventory Turnover 32.67 27.86 34.62 36.91 36.75 35.80 35.39 35.36
Asset Turnover = Sales / Total Assets 1.80 1.65 1.36 1.37 1.37 1.43 1.54 1.56
Financial Leverage Ratios
Debt to Equity = Total Liabilities / Stockholder's Equity 1.37 1.32 1.66 1.58 1.69 1.77 1.79 1.95
Interest Coverage Ration = EBITA / Interest Expense 7.34 11.28 10.41 5.78 3.90 2.57 2.61 3.32
Cash Flow to Debt = Cash Flow from Operations / Total Debt 0.36 0.40 0.24 0.17 0.13 0.10 0.13 0.15
Profitability Ratios
Gross Margin = Gross Profit / Gross Sales 11.19% 14.65% 15.27% 15.00% 13.00% 12.00% 12.00% 12.70%
Net Profit Margin = Net Income / Sales 2.95% 4.79% 4.64% 4.44% 2.67% 1.64% 1.64% 2.08%
Return on Assets = Net Income / Average Total Assets 6.00% 8.70% 8.73% 8.55% 5.26% 3.29% 3.33% 4.29%
Return on Equity = Net Income / Stockholder's Equity 12.57% 18.37% 16.80% 15.67% 9.81% 6.50% 7.04% 9.55%
Payout Policy Ratios
Payout Ratio = Dividends / Earnings 0.14 0.14 0.20 0.23 0.42 0.73 0.77 0.64
Total Payout Ratio = (Dividends + Repurchases) / Net Income 0.41 1.10 0.49 0.49 0.79 1.26 1.24 0.97
Retention Ratio = 1 - Payout Ratio 0.86 0.86 0.80 0.77 0.58 0.27 0.23 0.36
Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)
Operating Operating Operating
Fiscal Years Ending Sept. 30 Leases Fiscal Years Ending Sept. 30 Leases Fiscal Years Ending Leases
2017 186 2016 172 2016 125
2018 137 2017 118 2017 98
2019 100 2018 92 2018 72
2020 74 2019 66 2019 48
2021 48 2020 43 2020 39
Thereafter 105 Thereafter 108 Thereafter 111
Total Minimum Payments 650 Total Minimum Payments 599 Total Minimum Payments 493
Less: Interest 81 Less: Interest 77 Less: Interest 68
PV of Minimum Payments 569 PV of Minimum Payments 522 PV of Minimum Payments 425
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 4.59% Pre-Tax Cost of Debt 4.59% Pre-Tax Cost of Debt 4.59%
Number Years Implied by Year 6 Payment 2.2 Number Years Implied by Year 6 Payment 2.5 Number Years Implied by Year 6 Payment 2.8
Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 186 177.8 1 172 164.5 1 125 119.5
2 137 125.2 2 118 107.9 2 98 89.6
3 100 87.4 3 92 80.4 3 72 62.9
4 74 61.8 4 66 55.2 4 48 40.1
5 48 38.4 5 43 34.4 5 39 31.2
6 & beyond 48 78.1 6 & beyond 43 79.8 6 & beyond 39 81.4
PV of Minimum Payments 568.8 PV of Minimum Payments 522.0 PV of Minimum Payments 424.7
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 7,547,518
Average Time to Maturity (years): 7.00
Expected Annual Number of Options Exercised: 1,078,217
Current Average Strike Price: 40.54$
Cost of Equity: 5.09%
Current Stock Price: $71.29
2018E 2019E 2020E 2021E 2022E 2023E
Increase in Shares Outstanding: 1,078,217 1,078,217 1,078,217 1,078,217 1,078,217 1,078,217
Average Strike Price: 40.54$ 40.54$ 40.54$ 40.54$ 40.54$ 40.54$
Increase in Common Stock Account: 43,710,911 43,710,911 43,710,911 43,710,911 43,710,911 43,710,911
Change in Treasury Stock 581,000,000 841,600,000 841,600,000 841,600,000 841,600,000 841,600,000
Expected Price of Repurchased Shares: 71.29$ 74.92$ 78.73$ 82.73$ 86.94$ 91.36$
Number of Shares Repurchased: 8,149,811 11,233,944 10,690,238 10,172,847 9,680,497 9,211,976
Shares Outstanding (beginning of the year) 297,596,071 290,524,477 280,368,750 270,756,729 261,662,098 253,059,818
Plus: Shares Issued Through ESOP 1,078,217 1,078,217 1,078,217 1,078,217 1,078,217 1,078,217
Less: Shares Repurchased in Treasury 8,149,811 11,233,944 10,690,238 10,172,847 9,680,497 9,211,976
Shares Outstanding (end of the year) 290,524,477 280,368,750 270,756,729 261,662,098 253,059,818 244,926,058
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol TSN
Current Stock Price $71.29
Risk Free Rate 3.07%
Current Dividend Yield 1.30%
Annualized St. Dev. of Stock Returns 24.70%
Average Average B-S Value
Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares Price Life (yrs) Price Granted
Range 1 7,547,518 40.54 7.00 34.58$ 260,984,213$
Range 2
Range 3
Range 4 -$
Range 5 -$
Total 7,547,518 40.54$ 7.00 40.26$ 260,984,213$
Sensitivity Analysis
DCF DCF
Share Price 70.04$ 0.36 0.40 0.44 0.48 0.52 0.56 0.60 Share Price 70.04$ 3.84% 4.09% 4.34% 4.59% 4.84% 5.09% 5.34%
3.60% 93.48$ 87.95$ 82.90$ 78.26$ 73.99$ 70.04$ 66.37$ 22.75% 71.50$ 71.26$ 71.03$ 70.80$ 70.57$ 70.35$ 70.13$
3.80% 90.65$ 85.09$ 80.02$ 75.38$ 71.10$ 67.16$ 63.52$ 23.00% 71.24$ 71.01$ 70.78$ 70.55$ 70.32$ 70.10$ 69.88$
4.00% 87.95$ 82.37$ 77.28$ 72.64$ 68.37$ 64.45$ 60.82$ 23.25% 70.99$ 70.76$ 70.52$ 70.29$ 70.06$ 69.84$ 69.62$
Equity Risk Premium 4.20% 85.37$ 79.77$ 74.68$ 70.04$ 65.79$ 61.88$ 58.28$ Marginal Tax 23.50% 70.74$ 70.50$ 70.27$ 70.04$ 69.81$ 69.58$ 69.36$
4.40% 82.90$ 77.28$ 72.19$ 67.56$ 63.33$ 59.45$ 55.88$ 32.00% 61.74$ 61.47$ 61.20$ 60.94$ 60.68$ 60.42$ 60.17$
4.60% 80.53$ 74.91$ 69.83$ 65.21$ 61.00$ 57.14$ 53.60$ 33.00% 60.62$ 60.34$ 60.07$ 59.81$ 59.55$ 59.29$ 59.03$
4.80% 78.26$ 72.64$ 67.56$ 62.97$ 58.78$ 54.95$ 51.43$ 37.50% 55.43$ 55.13$ 54.85$ 54.56$ 54.28$ 54.01$ 53.73$
DCF DCF
Share Price 70.04$ 4.57% 4.77% 4.97% 5.17% 5.37% 5.57% 5.77% Share Price 70.04$ 2.35% 2.60% 2.85% 3.07% 3.35% 3.60% 3.85%
2.30% 79.07$ 70.20$ 62.66$ 56.17$ 50.52$ 45.57$ 41.18$ 11.17% 91.39$ 82.27$ 74.41$ 68.35$ 61.58$ 56.27$ 51.53$
2.20% 75.81$ 67.53$ 60.44$ 54.31$ 48.95$ 44.23$ 40.04$ 11.52% 92.14$ 82.96$ 75.05$ 68.95$ 62.13$ 56.78$ 52.02$
2.10% 72.80$ 65.05$ 58.38$ 52.57$ 47.48$ 42.97$ 38.96$ 11.87% 92.84$ 83.60$ 75.65$ 69.51$ 62.65$ 57.27$ 52.47$
CV NOPLAT Growth 2.00% 70.04$ 62.75$ 56.45$ 50.95$ 46.09$ 41.79$ 37.93$ CV ROIC Growth 12.22% 93.51$ 84.21$ 76.21$ 70.04$ 63.14$ 57.73$ 52.90$
1.90% 67.48$ 60.62$ 54.65$ 49.42$ 44.79$ 40.66$ 36.96$ 12.57% 94.13$ 84.79$ 76.74$ 70.54$ 63.60$ 58.16$ 53.31$
1.80% 65.10$ 58.63$ 52.97$ 47.98$ 43.56$ 39.60$ 36.04$ 12.92% 94.72$ 85.33$ 77.25$ 71.01$ 64.03$ 58.57$ 53.69$
1.70% 62.89$ 56.76$ 51.38$ 46.63$ 42.39$ 38.59$ 35.16$ 13.27% 95.28$ 85.85$ 77.72$ 71.45$ 64.45$ 58.95$ 54.06$
DCF
Share Price 70.04$ 82.0% 83.0% 84.0% 85.0% 86.0% 87.0% 88.0%
4.95% 76.38$ 75.48$ 74.58$ 73.68$ 72.78$ 71.88$ 70.97$
5.30% 75.17$ 74.27$ 73.36$ 72.46$ 71.56$ 70.66$ 69.76$
5.65% 73.95$ 73.05$ 72.15$ 71.25$ 70.35$ 69.45$ 68.55$
SG&A (% of Sales) 6.00% 72.74$ 71.84$ 70.94$ 70.04$ 69.14$ 68.23$ 67.33$
6.35% 71.53$ 70.63$ 69.72$ 68.82$ 67.92$ 67.02$ 66.12$
6.70% 70.31$ 69.41$ 68.51$ 67.61$ 66.71$ 65.81$ 64.91$
7.05% 69.10$ 68.20$ 67.30$ 66.40$ 65.50$ 64.59$ 63.69$
Beta
WACC
COGS (% of Sales)
Pre-Tax Cost of Debt
Risk-Free Rate