In this article, let's take a look at Tyson Foods, Inc. (TSN, Financial), a $17.19 billion market cap company. Tyson is one of the world's largest suppliers of beef, chicken, pork, and prepared foods. The firm operates in the food industry, which is highly competitive and is dominated by HJ Heinz (HNZ, Financial), Kraft Foods (KRFT, Financial), General Mills (GIS, Financial) and Kellogg (K, Financial).
Ups and downs
First Eagle Investment (Trades, Portfolio), David Dreman (Trades, Portfolio), John Burbank (Trades, Portfolio) and Jim Simons (Trades, Portfolio) have initiated new positions in the stock in the second quarter with 701,500; 31,543; 5,107 and 73,300 shares, respectively. One of the most bullish moves was the one made by PRIMECAP Management (Trades, Portfolio), which upped its stake by 98.43% to 1.26 million shares.
On the bearish side, Louis Moore Bacon (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) sold out the stock. Further, Pioneer Investments (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), and Ray Dalio (Trades, Portfolio) have reduced their positions by 12.30%, 54.46%, and 54.85%. More bearish were Steven Cohen (Trades, Portfolio), Chris Davis (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) with reductions of more than 80%.
One of the largest shareholders is Ken Griffin's Citadel Investment Group. The fund disclosed holding 3.27 million shares, up by 10% on the quarter, with the value of the stake amounting to $139.72 million.
Integration and synergies
Tyson has a huge amount of debt to finance the premium it paid for Hillshire Brands. The company made the move because its business fits well with the company's plans to expand the prepared foods business.
The deal makes the company the leading meat brands including Jimmy Dean and Hillshire Farms. Hillshire is a nice bet because it complements Tyson's portfolio. At the start, one important issue was the reduction of costs by removing duplicative expenses. About $500 million was expected in cost synergies. At this moment, we can say that the integration was effective and has reached $225 million in synergies and improvements in beef production.
Forward looking
There is no doubt that chicken is Tyson's largest and most profitable segment, but the price of chicken is hard to predict. Tyson was and may be affected by the cyclicality of the markets due to its high exposure to agricultural commodities.
Revenues and profitability
Revenue grew by 4% to $10,071 million from $9,682 million and explain some part of earnings per share increase of 13.7% in the most recent quarter compared to the same quarter a year ago ($0.83 vs. $0.7). In the next chart we can appreciate Tyson´s earnings per share growth over the past years. This is very important because the competition makes margins low and achieving earning profit becomes a challenge.
During the past fiscal year, the company increased its bottom line. It earned $2.40 versus $2.32 in the previous year. This year, Wall Street expects an improvement in earnings ($3.19 vs. $2.40).
Finally, let's compare the best measure of performance for a firm's management: the return on equity, which is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| TSN | Tyson | 14.43 |
| MJN | Mead Johnson Nutrition Co | 121.61 |
| K | Kellogg Co | 12.60 |
| CAG | ConAgra Foods Inc | -4.97 |
| Â | Industry Median | 6.82 |
The company has a current ROE of 14.43% that is higher than the one exhibit by Conagra Foods Inc. (CAG, Financial) and Kellogg. Analysts consider ROE ratios in the 15% to 20% range as representing attractive levels for investment. So for investors looking for those levels or more, Mead Johnson Nutrition (MJN, Financial) exhibited a very attractive ratio.
It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
| Quarter Ended | Mar-15 | Jun-15 | Sep-15 | Dec-15 | Mar-15 | Jun-15 | Sep-15 | Dec-15 | Mar-15 | Jun-15 |
| ROE (%) | 6.28 | 16.21 | 16.82 | 16.27 | 13.40 | 15.84 | 7.03 | 13.72 | 13.42 | 14.43 |
Relative valuation
In terms of valuation, the stock sells at a trailing P/E of 15.96x, trading at a discount compared to an average of 20.0x for the industry. To use another metric, its price-to-book ratio of 1.79x indicates a premium versus the industry average of 1.52x while the price-to-sales ratio of 0.43x is below the industry median of 0.87x.
The stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $26,401, which represents a 21.5% compound annual growth rate.
Final comment
The company has several advantages that may attract investors, including strong earnings growth. Also, the P/B ratio is close to a one-year low of 1.62, and the P/S Ratio (=0.42) is close to 10-year high of 0.44. It is a good moment to buy a cheap stock.
Disclosure: Omar Venerio holds no position in any stocks mentioned
