Home > Stock Analysis

Tyson Plucks Along

Posted: Nov 24, 2009 11:20 AM by Sham Gad

Tickers in this Article: PG, K, GIS, TSN

Tyson Foods (NYSE:TSN), the world's largest processor of chicken, beef and pork, announced fourth-quarter and fiscal year results that on par with what one would expect during this type of economic environment. In today's world, many would prefer to be selling beef and chicken to grocers than blue jeans to teenagers.

Get Free Stock Analysis By Email

IN PICTURES: 20 Tools For Building Up Your Portfolio

Benefiting From Thrift
Stripping out the goodwill impairment charges, Tyson earned 28 cents in the quarter, more than double last year's comparable quarter figure of 13 cents, and 2 cents above analysts estimates. More so, sales were essentially flat quarter over quarter and the nine month period. It's not often that flat sales growth is considered an excellent result, but consider that other excellent quality businesses like Kellogg (NYSE:K), Procter and Gamble (NYSE:PG) and General Mills (NYSE:GIS) all experienced declining sales growth, despite strong profits. It goes to show that meat consumption is important to families, but it's much more affordable to buy it from the grocery store than to dine out.

Sales in all three meat categories experienced double-digit increasing volume, which helped offset the slightly higher price decline in beef and pork.

Cleaning House
The goodwill impairment change reduced shareholders equity to $4.3 billion, from $5 billion. What remains on the balance sheet is nearly $2 billion of remaining goodwill and intangibles. While it's difficult to predict the amount of any future write-downs, the goodwill isn't worth zero, considering the value of the Tyson brand and the company's customer relations.

Investors may want to focus on cash flow, which can be a good report card of whether or not a company's succeeding in it's strategic efforts. Tyson churned out over $1 billion in operating cash flow for the year, and $650 million in free cash flow. Measure those numbers against the market cap of $4.8 billion and you get a 20% FCF yield for the year. Even against the enterprise value of $7.6 billion, the yield is very attractive. (For related reading, check out Analyze Cash Flow The Easy Way.)

The Bottom Line
A business like Tyson will always have to deal with meat prices affecting sales. Thankfully, because the company sells the three main proteins, a price increase in one protein is made up by a volume increase in another as consumers respond to substitutes. If beef gets expensive, frugal folks will respond by eating more of the lesser priced protein alternatives. Going forward, continued improvement in cash flow along with a insatiable desire to have meat at the dinner table should get Tyson through this environment relatively unscathed. (For related reading, check out 22 Ways To Fight Rising Food Prices.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS