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Why Is This One Company the Best Protein Play?

Source: Tyson Foods

The high-protein diet is neither a recent trend nor a new fad. In fact, the world's consumption of protein has increased more than four-fold over the past six decades. Looking ahead, expectations call for global protein consumption to hit the 300,000 million metric-ton mark by 2022, from a 50,000 million metric-ton consumption level in the 1960's. The supply hasn't caught up with demand. With local production of chicken and beef relatively stagnant over the past decade, the composite average price of domestic meats has increased from $1.10 in 2002 to $1.80 in 2013. Which companies might benefit from this?

Tyson Foods (NYSE: TSN  ) is the country's largest poultry producer, and it also has a significant presence in the pork and beef markets. Estimates have found that Tyson produces about one out of every five pounds of chicken, beef, and pork in the U.S. Does this make Tyson Foods the best proxy for the growth of protein demand? How does Tyson compare with peers Pilgrim's Pride (NASDAQ: PPC  ) and Sanderson Farms (NASDAQ: SAFM  ) ?

Diversification pays
Among its peers, Tyson Farms boasts unique multi-national, multi-channel, and multi-protein strategies. With respect to international diversification, Tyson Farms plans to go beyond its key foreign poultry business in Mexico to further expand its operations in Brazil, China, and India. Furthermore, in addition to its traditional retail, food service, and export channels, Tyson Farms is also exploring new distribution opportunities with dollar stores, convenience stores, and drug store chains.

Most importantly, it has a multi-protein portfolio that produces anything from fresh chicken, bacon, and beef patties to prepared foods such as beef & pork pizza toppings. In addition, it has a dominant position in U.S. chicken, beef, and pork markets, where it is the largest chicken and beef producer and the second-biggest pork producer.

Tyson Farms' peer Pilgrim's Pride also believes in the benefits of diversification, especially with respect to expanding customer channels. It has limited customer concentration risks, as no single one of its 5,000 foodservice and retail customers accounts for more than one-tenth of its sales.

Pilgrim's Pride has also significantly diversified its export markets over the years. While Russia used to represent 42% of its export volume in 2007, it accounted for a mere 14% in 2013. While such efforts are commendable, there is no escaping the fact that Pilgrim's Pride is primarily a poultry company.

Source: Tyson Foods

Given that chicken, beef, and pork substitute nearly perfectly for each other, Tyson Farms is better positioned to capitalize on the growth in protein demand as customers switch between the different meat types.

Flexible sourcing approach
Tyson Foods adopts a great deal of flexibility when it comes to its sourcing strategies. It purchases livestock for its beef and pork business segments to avoid feed cost risk. It also has the ability to impact supply in the poultry market by retaining the options of outsourcing chicken parts and reducing in-house production when demand falls.

With respect to vertical integration in the chicken business, Tyson Foods is far more vertically integrated than Sanderson Farms. Tyson Farms produces almost all of its breeder chickens and live broilers in-house, and even runs its own feed mills. 

In contrast, Sanderson Farms places its chicks on the farms of more than 600 independent contract broiler producers. This means that Sanderson Farms may have issues with recruiting more contract growers in times of unexpected high demand. In the worst case scenario, if contract renewal negotiations with existing growers don't proceed well this might disrupt Sanderson Farms' operations.  

As a result, Tyson Foods operates a flexible, asset-medium sourcing model that allows it to be neither overly dependent on suppliers nor too capital-intensive.

Foolish final thoughts
At the recent 18th Annual Goldman Sachs Agribusiness Conference in March, company executives at Tyson Foods guided for "stable, consistent earnings growth to continue." More specifically, Tyson Foods expects annual revenue growth and EPS growth of 3%-4% and 10%, respectively, over time.

In my opinion, Tyson Foods can achieve these targets, given its diversified business model and flexible sourcing approach which help it mitigate uncertainties. This makes Tyson Foods a better play on protein growth than its peers.


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Mark Lin

Mark is a private value investor and is the author of website which uses a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders.

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8/31/2015 11:06 AM
PPC $20.85 Up +0.04 +0.19%
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Sanderson Farms CAPS Rating: *****
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