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.
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