The Long and Short
Value in the long end of the Tyson Foods curve
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
With Tyson Foods set to report fiscal first quarter earnings in early February, its long-dated paper offers good relative value given the company’s conservative balance sheet, strong credit metrics and record performance in 2022. Even in the face of intense inflation, improving productivity led to EBITDA margins stronger than before the pandemic. And a focus on debt reduction has kept leverage well below management’s long-term target. The company gained considerable market share in fiscal 2022 across key retail categories and in the food service business, setting the stage for improved volume performance in fiscal 2023. Compared to similarly rated peers such as McCormick & Co., it’s clearly a better value.
Looking at the curve of G-spread by maturity, TSN’s curve is steeper than its similarly rated peer McCormick & Co. (MKC Baa2/BBB (n)), providing for better value in longer duration paper (Exhibit 1).
Exhibit 1. Food and Beverage Curve (7y-30y)
Source: Bloomberg TRACE; APS
Leverage Strong for the Ratings
While TSN’s long-term net leverage target is below 2.0x, we note that TSN has been keeping that metric closer to the 1.0x area. TSN ended fiscal 2022 with net leverage of 1.3x. On a gross basis, TSN ended the year with leverage of 1.5x. This was down 2 ticks from the prior year period as management has continued to prioritize debt reduction and has repaid approximately $3.8 billion in total debt since March 2020.
TSN’s leverage metrics compare very favorably to similarly rated peers. In fact, TSN’s leverage is typically a turn or more below other food and beverage peers (Exhibit 2). TSN has historically managed leverage well below its target level and we typically only see leverage creep above that level post a larger acquisition. When comparing TSN to MKC, we note that MKC is targeting leverage of 3.0x by year end 2024.
Exhibit 2. Food & Beverage Leverage Metrics
Source: Company Reports; Bloomberg; APS
EBITDA Margins Above Pre-Pandemic Levels
While the packaged food space witnessed considerable top line and margin growth in fiscal 2021, inflation significantly impacted margins in 2022. It seemed most packaged food credits were playing catch up in 2022, as the rate of food inflation hit the mid-high teens area and price increases were below that inflation rate. That said, while the top line was benefiting from those increases, margins were squeezed and fell off considerably, with most credits now posting EBITDA margins below the rate witnessed prior to the pandemic (Exhibit 3).
Exhibit 3. Food & Beverage EBITDA Margin Comparison
Source: Company Reports; Bloomberg; APS
TSN has largely bucked that trend as the company had put in place a productivity program that focused on optimizing antiquated business processes, increasing automation and digitalizing its supply chain. Additionally, TSN aggressively managed SG&A to offset the dramatic rise in COGs, targeting more than $1 billion in recurring savings by fiscal year-end 2024. However, management delivered roughly $700 million in savings in fiscal year 2022 and now expects to hit its savings target by year end 2023, a full year ahead of expectations. These recurring savings not only helped to offset inflationary pressures but helped to improve TSN’s competitiveness in the marketplace.
Food Service Recovery Slow; TSN gaining share
While the food service industry has yet to return to pre-pandemic traffic levels, TSN’s Focus 6 Group (Chicken Value Added, Breakfast Sausage, Dinner Sausage, Pepperoni Pizza Topping, Bacon, Philly Steak) witnessed strong yoy volume growth of 18.6%. This not only outpaced the broader food service business by 820bps, but also outpaced the respective categories of competitors by 330bps. This led to a market share gain of nearly 1% in 2022 and 1.7% since 2019. Management noted that the food service business drove an increase in sales of $2 billion in 2022. TSN is confident in its current food service portfolio and expects the business line to continue to be a growth driver in 2023 as the channel continues to recover. With the market share gains witnessed this year, management noted that they now maintain the #1 position in the majority of the nineteen food service categories that they operate in.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.