With nothing more than a passing glance it would be easy to assume one's just as good for your portfolio as the other. After all, it's meat. How different can the two companies be?
As it turns out, a lot. Whereas Tyson Foods (TSN -0.43%) largely sells raw chicken, beef, and pork products for consumers to cook to their liking, the bulk of Hormel Foods' (HRL 0.14%) business is precooked products that just need to be heated up.
This seemingly small difference is a pretty big deal, making one of these companies' stocks a better, more reliable bet than the other.
Spoiler alert: Hormel is the better buy.
There's one important difference
Investors keeping tabs on the company likely already know Tyson Foods has been run through the fiscal wringer of late. Last quarter was no exception. Sales fell 3% year over year, while prices it passed along to customers fell to the tune of 2.6%. But the year-ago per-share profit of $1.84 was dragged down to operating (non-GAAP) earnings of only $0.15 per share for the three-month stretch ending in early July and an outright GAAP loss.
TSN Revenue (Quarterly) data by YCharts
Surprised to see a relatively modest dip in sales lead to such a dramatic dip in earnings? The challenge -- and the problem for Tyson Foods -- is fourfold.
First, the underlying price changes are rooted in ever-changing supply-and-demand dynamics that are difficult (if not impossible) to predict. Second, profit margin rates are relatively thin for the business, leaving no room for error or inefficiency. Third, Tyson's wholesale purchasing costs aren't necessarily synced up with the prices consumers see in the grocery store; it may have paid a fairly steep price for the protein products that are suddenly cheaper for consumers. And fourth? Even if retail prices for chicken, beef, and pork were updated exactly when wholesale prices were changed, the company is still competing with food companies running businesses that aren't nearly as sensitive to price and cost changes.
Yes, Hormel is one of these competing businesses. Although it must still be cost-conscious as well as price-conscious, it's got more places to offset higher protein input costs. These places include packaging, nonprotein ingredients, and preparation and processing expenses. Moreover, in that the cost of all of these inputs means packaged foods are already priced relatively higher on store shelves, their slightly higher retail prices don't feel quite as steep in consumers' minds.
In other words, Hormel Foods' top and bottom lines are more resilient, and therefore more predictable.
And the numbers bear this out. While Tyson is still trying to get a handle on its cost and pricing dynamic, Hormel's top and bottom lines are moving in step with actual prices and consumption. Last quarter's total revenue fell 3.8%, versus a similar 5.6% decline in the total amount of food sold. Total profits fell 11.6% year over year, but the company's still profitable, turning 7.3% of its sales into net earnings. That's in line with the year-ago comparison of 8.4%, as well as with its long-term norms. Tyson's profit margin rates, conversely, are not only historically narrower but have been particularly pressured since inflation soared last year.
HRL Profit Margin data by YCharts
Given the wholesale costs of pork, beef, and chicken, which are still changing rapidly at the same time that consumer inflation is (although it's cooling) also still relatively high, don't look for Tyson's bottom line to stabilize anytime soon.
Buy Hormel over Tyson ... at least for now
This won't always be the case, mind you. When the economy is sustainably stable and the chicken, beef, and hog production industries can operate consistently, Tyson can procure and price their products in a way that's not only competitive, but affordable. That's the way things were between 2012 and 2018. They'll eventually be that way again.
Without any way of knowing when that time may come, though, a multidimensional food company like Hormel is the more palatable investment option. It's not only not closely tethered to the volatile price of meat commodities, but it can adjust other input costs of its prepared foods when it needs to help strained consumers. Tyson just doesn't have this flexibility.
Then there's the bigger takeaway: This comparison is another example of the fact that when you invest, you're not buying a stock -- you're buying into a particular business.
