In May 2023, Tyson Foods (TSN -0.43%) completed the acquisition of Williams Sausage Company. In the grand scheme of things, it wasn't a particularly huge deal. But it speaks to an important trend taking shape at this meat producer. Here's what you need to know to decide whether Tyson Foods buying branded meat companies is a good idea.
The core of Tyson's business is volatile
Tyson's beef sales make up around 35% of its top line. Chicken accounts for roughly 34% of the food maker's business. And pork is about 11%. Altogether, that adds up to approximately 70% of the company's revenue. Selling meat is clearly Tyson's main focus.
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The problem with meat is that it is a commodity product. Tyson really can't control the prices it gets for the beef, chicken, and pork it sells. Right now all three of these business lines face headwinds, and that's not the norm. Financial results look particularly weak at the moment as a result. Earnings fell a massive 89% year over year in the second quarter.
Tyson is working to manage the situation by doing things like cutting operating costs. But, because these are commodities, the prices it can charge customers are largely determined by factors outside its control. Inflation clearly doesn't help matters, either.
But what about that aforementioned sausage company?
Tyson is growing its value-added businesses
The sausage maker Tyson bought sells fresh sausage, cooked sausage, bacon, and sandwiches to retail and food service customers. This is different from selling commodity meats that other companies might use to create such products. Tyson is basically expanding the portfolio of value-added products it sells. For example, it already owns brands like Jimmy Dean, Ball Park, and Hillshire Farm, among many others.
These brands make up what the company calls prepared foods. Such products generally come with higher margins. This segment made up around 18% of sales in the second quarter. As Tyson buys additional brands, that number will only go higher. Like any business, sales in the company's prepared foods division will fluctuate over time. But the dynamics are inherently different.
To put some numbers on that, prepared foods saw a volume decline of 0.4% in the second quarter. However, the business was able to push through price increases of 1.4%. That resulted in a modest overall uptick in sales in the division. When it comes to beef, chicken, and pork -- commodity-driven markets -- Tyson doesn't have nearly that much control over its business fortunes. And this is why it is increasingly focused on prepared foods, with the consistency of the business providing ballast to its results.
Getting bigger and worth watching
Right now investors are focused on the difficult commodity meat market that Tyson Foods is facing. Given the importance of the beef, chicken, and pork businesses, that makes complete sense. However, long-term investors shouldn't ignore the prepared foods segment, which is 16% larger today (by sales) than it was in 2020. As prepared foods grow in importance, this segment of the business should help support Tyson's margins and smooth out the normal ups and downs of the company's commodity meat operations.
