Tyson Foods (NYSE:TSN) slaughters 42.9 million chickens every week. That's a lot of beaks -- but the real story at the Springdale, Ark.-based food giant these days is beef.
After acquiring IBP Foods in 2001, the ubiquitous producer of chicken also became the world's top seller of beef, a segment that checks in with $12 billion in sales, a little less than half the company's revenue.
Chicken, which accounts for about a third of Tyson's sales, is produced at a much higher margin than beef. Cluck bucks earn 6.5% vs. beef's far narrower 1.1% spread. That disparity generally isn't so wide; chicken had a good year, and beef tanked after Japan banned U.S. beef imports in December 2003. Forty nations followed suit and erected similar trade barriers in a panicky global response to mad-cow disease.
The result, according to Tyson's 2004 annual report, was $61 million in direct mad-cow-related costs and a whopping 9.8% drop in beef sales. Nevertheless, its 2004 performance was worth crowing about, especially under the circumstances: Earnings amounted to $1.13 per share on revenue of $26.4 billion, a 7.7% growth in revenue.
You might say that Tyson -- started in 1935 when founder John Tyson drove a truck loaded with chickens to Chicago for a $235 profit -- counts its chickens. Indeed, it measures and studies every facet of the 44-day journey from egg to the grocery case. The company can tell you, for instance, how many pounds of feed it takes to produce a 5.25-pound live chicken (that would be 9.975 pounds), and it's a safe bet that its beef business will begin to mirror the chicken division's efficiencies as the former IBP becomes more integrated with Tyson's culture. Even bringing the beef division's margins up to the 2003 level (2.7%) would have a significant impact. Assuming Tyson can recapture its lost international sales and achieve another year of 7.7% revenue growth, the bottom line could get even fatter. Atkins is still with us, and Tyson is the world's largest producer of protein.
Recapturing lost international beef revenue would bring in another $1 billion. Margins returning to 2003 levels would generate $351 million in earnings. Zero out the $61 million in direct mad-cow costs, add it up, and the beef ban being lifted could add $412 million to Tyson's net profit -- a mind-numbing scenario given 2004 earnings of $403 million. Assuming its P/E hovers at 14 or so, it's not irrational, or too exuberant, to conclude that earnings of $2.30 a share could mean a share price of $32 -- a roughly 75% gain from its current share price.
In the meantime, Tyson isn't standing still. While chicken and beef are its bread and butter, pork remains a huge division, and Tyson is also the world's largest producer of pizza toppings and flour tortillas. Its prepared-foods division brought in a not-insignificant $2.9 billion, and margins there have nowhere to go but up.
As Wal-Mart (NYSE:WMT), Tyson's northwest Arkansas neighbor, continues its international growth and domestic "Neighborhood Markets" initiative, it's likely that the mega-retailer -- which currently accounts for 12% of Tyson's sales -- will consume more and more; Tyson developed nearly 100 products last year alone to feed such demand.
The company has been aggressive in reducing its debt, paying down $242 million in 2004 and $1.4 billion in the past three years. That gives the company a fearsome agility to make acquisitions: Some observers expect a fight with rival (and Income Investor recommendation) Sara Lee (NYSE:SLE) over Kraft's Oscar Meyer brand, which could go on the block soon. And while Tyson already controls 26% of the U.S. chicken market, it undoubtedly would like to encroach on competitor Pilgrim's Pride's (NYSE:PPC) 16% market share as well.
The Department of Agriculture says the U.S. exported 461 million pounds of beef in 2004, down from 2.5 billion pounds the year before. Taiwan, at one point the sixth-largest importer of U.S. beef and the buyer of 4% of Tyson's international beef shipments, has loosened its restrictions. Secretary of State Condoleezza Rice has offered Japan no less a carrot than U.S. support for Japan's bid to get a permanent seat on the U.N. Security Council -- if the nation lifts its ban on U.S. beef.
In the meantime, there's no reason to think that Tyson can't keep its chicken, pork, and prepared-foods divisions humming. Continued success on those fronts, a loosening of beef restrictions, a perkier balance sheet, and a high-profile acquisition could make Tyson look awfully juicy to investors. Plus, a little buying goes a long way with this company: 90% of its shares are held by the Tyson family, other insiders, or institutions -- and only about 35 million shares are actively traded.
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Fool contributor Andy Obermueller doesn't own shares of Tyson or of any other company mentioned here. He doesn't know Condoleezza Rice and has never even been close to Japan. But he can dream, can't he?
