Tyson Foods: Valuation Discount, Combined with Growth Drivers

Scott Phillips of Templeton & Phillips Capital Management presented his in-depth investment thesis on Tyson Foods (US: TSN) at Best Ideas 2020.

Thesis summary:

Tyson Foods is the largest U.S. protein producer with approximately 20% market share across beef (37% of sales), chicken (30%), pork (10%), and prepared foods (22%). The company is well positioned in both the near-term and long-term due to cyclical factors, secular drivers, and disciplined capital allocation.

On the cyclical front, the firm is a key beneficiary of the widespread outbreak of African Swine Fever (ASF) in Asia. In China alone, industry estimates suggest ~200 million pigs have been culled, representing ~50% of domestic supply. Similarly, outbreaks in nearby markets including Vietnam, Laos, Mongolia, and Cambodia suggest a significant reduction in regional supply (millions of pigs), whereas China is the largest global consumer of pork. In light of the deficits, domestic pig prices in China doubled in late 2019, and the country has turned to imports of a wide array of proteins to offset the price shock and supply deficits. China has lifted preexisting bans on poultry imports, representing a significant potential tailwind for Tyson in poultry as well as across its remaining protein sales. The ASF impact on global protein prices is expected to last more than a year, and should prices and margins repeat historical relationships, Tyson and peers could experience margin expansion.

On the secular front, the firm is well positioned to leverage its expansive distribution and physical assets in the production and sale of plant-based meats. Tyson was an early investor in Beyond Meat with 6.5% of its equity, which was sold just prior to the IPO. Tyson has been outspoken regarding the market opportunity in plant-based meats, and believes it can market its intellectual property through its vast network of distribution. Industry estimates suggest that plant-based meat could grow to a $35 billion market in the years to come, as compared to ~$670 million level today.

Despite its demonstrated success in acquiring value-added brands and future opportunities Tyson shares recently traded at 13x earnings, in-line with its historical average and a material discount to the 19x multiple among packaged food peers.

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About the instructor:

Scott Phillips is a principal and portfolio manager at Templeton and Phillips Capital Management, LLC. Prior to working with Templeton and Phillips Capital Management, LLC, Scott Phillips founded Cumberland Capital Corp, located in Chattanooga, TN. Founded in June 2004, Cumberland Capital provided equity research services to Green Cay Asset Management, a hedge fund management company located in Nassau, Bahamas. In this capacity with Cumberland Capital, Scott was the lead research analyst on the Siebels Hard Asset Fund a long/short equity fund managed by Green Cay Asset Management. In addition to consulting on this fund Scott also provided equity recommendations for the Green Cay Emerging Markets Fund. Prior to consulting Green Cay’s funds Scott was employed as a research analyst with Green Cay beginning in January of 2004. Before joining Green Cay, Scott was an equity research associate analyst with SunTrust Robinson Humphrey (including its predecessor companies) in Atlanta GA from January of 1999 to December of 2003. Scott co-authored with Lauren Templeton of the book “Investing the Templeton Way” released in 2008 by McGraw Hill. Scott is also the author of “Buying at the Point of Maximum Pessimism” a book on forward looking investment themes published by the FT Press in 2010. In addition to these books, Scott co-authored a revision of William Proctor’s 1983 biography of Sir John Templeton titled “The Templeton Touch” released in December 2012. Scott is a member of the John Templeton Foundation where he serves on the Finance Committee and Scott serves as chairman for the board trustees of the Templeton Foundation Inc, and as a member of the Audit Committee. Scott received his B.A. The University of the South.