Tyson: Short-Term Concerns, But Long-Term Outlook Intac

We do not plan to make a large change to our $55 per share valuation for no-moat Tyson (TSN) after it reported soft fourth-quarter earnings. In fiscal 2016, Tyson posted a 9.2% adjusted sales decline alongside a 7.7% adjusted operating margin, slightly lagging our 8.9% and 7.8% expectations, respectively. We had been more pessimistic than prevailing sentiment about Tyson’s long-term margin prospects as protein prices normalize and believed pre-announcement trading levels priced the stock to perfection. As a result, despite the post-earnings share price slide, we do not expect to make a significant change to our long-term outlook that calls for 3% revenue growth and 7% operating margins, on average, from fiscal 2017-25.

Tyson’s chicken segment (30% of fiscal 2016 sales) posted a 2.2% full-year top-line shortfall, which was near our 2.5% decline expectation. However, its fourth-quarter and full-year volume dips were troubling, especially as wholesale-to-retail ground beef spreads remain high, indicating consumers are not yet receiving the full benefit of cheaper cattle (we had expected top-line pressure to come from pricing, which was aided by mix changes to a greater degree than anticipated). We continue to project chicken’s low cost and health profile will mitigate pressure from beef and push poultry’s share of protein consumption higher at the expense of red meat, but further deterioration may alter our short-term view.

Tyson also announced Tom Hayes will succeed 56-year-old Donnie Smith as CEO at year-end. While Hayes’ succession is unsurprising after his elevation to the role of president in mid-2016, the timing is curious, especially after a soft quarter and amid an industry price fixing lawsuit. We do not expect a change in strategy or capital allocation practices, and are not changing our Standard stewardship rating. However, we are not enamored with share repurchases to date, as they were executed at prices well above the fair value of the equity.

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