Markets & Finance

Tyson Rules the Roost


By Joseph Agnese Note: The Focus Stock column will not be published on July 8. It will return on July 15.

Companies like Tyson Foods (TSN), the world's largest processor and marketer of beef, chicken, and pork products, have a strong defensive appeal in an uncertain economic environment. And that, combined with the solid growth of Tyson's value-added products, creates opportunity for investors. Tyson shares carry S&P's highest investment recommendation of 5 STARS (buy).

Through its late 2001 acquisition of IBP, the world's largest supplier of fresh beef and pork, Tyson holds about 28% of the U.S. beef market, 23% of the chicken market, and 18% of the pork market. The company conducts its operations through five segments: beef, chicken, pork, prepared foods, and other.

With nearly a quarter of the U.S. chicken market, it's no wonder the Tyson name is synonymous with chicken. It sells fresh, frozen, and value-added chicken products in the U.S. through food-service and retail markets for at-home consumption. It also sells poultry through wholesale clubs targeted to small food-service operations and individuals, and distributors that deliver to restaurants and schools. Tyson also sells chicken in international markets. This segment includes sales from allied products and a chicken breeding-stock operation.

DRESSED CARCASSES. The pork division was formed through the combination of Tyson's live swine group and IBP's hog slaughter and fabrication, case-ready products, and related processing activities. It also sells allied products to pharmaceutical and technical products manufacturers, as well as to live swine and pork processors.

The beef segment consists primarily of IBP operations. Live cattle are slaughtered and processed into a variety of cuts and case-ready products. Operations reduce live cattle to dressed carcasses and allied products for sale to customers who further process the meat. Allied products are marketed to manufacturers of pharmaceuticals and animal feeds. Beef and pork products are sold to food retailers, distributors, wholesalers, restaurants, hotel chains, and other food processors in domestic and international markets.

Tyson's prepared-foods segment includes Foodbrands America, acquired in the IBP deal, which manufactures and markets frozen and refrigerated food such as pepperoni, beef and pork toppings, pizza crusts, appetizers, hors d'oeuvres, desserts, prepared meals, Mexican and Italian foods, soups, sauces, side dishes, and branded and processed meats. This segment also produces flour and corn tortilla products and specialty pasta and meat dishes for restaurants, airlines, and other major customers.

COMBINING FORCES. As a result of the IBP acquisition, Tyson expects to realize annual savings of over $200 million by fiscal 2004 (ending September) through synergies in purchasing, general and administrative functions, and transportation and logistics. Economies of scale are enabling it to increase purchasing power by negotiating lower prices. Tyson is realizing additional synergies through the combination of human resources, accounting, and information-technology functions. Further, the integration of supply-chain resources has increased transportation and logistics efficiencies.

Synergies from the IBP deal have also created improved service levels, responsiveness, and custom capabilities for customers. For example, combining IBP's refrigerated distribution capabilities with those of Tyson's frozen distribution system will enable it to deliver combined beef, chicken, and pork loads for a single order on a single invoice.

The merger of IBP and Tyson operations creates growth opportunities for branded products. Tyson is the only nationally branded chicken company, while IBP began establishing the first national retail brand of case-ready red meat with Thomas E. Wilson fresh beef and pork. Its national distribution system, coupled with customer relationships, positions Tyson well toward making the Thomas E. Wilson brand synonymous with value-added beef and pork products -- just as the Tyson brand is synonymous with value-added chicken products.

FATTER MARGINS. With higher meat pricing and improved international markets, we expect Tyson's total sales to grow about 6% in fiscal 2003, to $25.5 billion from an estimated $24 billion in fiscal 2002. A more profitable product mix, with higher-margin value-added products, including fully cooked chickens, accounting for a rising proportion of sales, should fatten margins. And with over $100 million in synergy benefits resulting from combined operations and lower interest expense, earnings per share should rise 20%, to $1.38, in 2003, from the $1.15 estimated for fiscal 2002.

At S&P, we believe Tyson is attractively valued on several fronts. Recently trading at 11 times our fiscal 2003 EPS estimate of $1.38, the shares are priced at a discount to the price-earnings multiples of the S&P 500 and to those of peer companies that we follow. We see an expansion of that multiple resulting from Tyson's increased focus on higher-margin value-added and branded products, as earnings growth becomes more consistent and it becomes more insulated from the effects of commodity price fluctuations.

And based on our conservative discounted assumptions of free cash-flow growth in the upper single digits for the next five years -- gradually trailing down to a probable sustainable growth rate of 3% -- S&P estimates that Tyson's intrinsic value is $22 to $24 per share. That's a significant premium to its June 28, 2002, closing price of $15.51. Our target price is $20, based on our p-e analysis and free cash-flow projections, or 29% above the June 28 closing price. Analyst Agnese covers food stocks for Standard & Poor's


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