Tyson Foods: Growing Cost Pressures Likely To Cause Profit Margin Decline

 

·         Tyson Foods has seen its operating cash flow surge over the past two years as meat prices have skyrocketed due to inflationary factors.

·         The company is struggling with growing labor turnover and absenteeism, leading to significant increases in production costs - an issue that vaccine mandates may exacerbate.

·         Record high meat prices are benefiting demand growth for alternative products such as plant-based protein.

·         The Biden Administration recently released a report that indicated potential actions to reduce Tyson Foods' apparent oligarchic pricing power.

·         Overall, it seems highly likely that Tyson Foods will soon see a sharp reversal in its profit margins which is problematic considering its tremendous liabilities.

 

Harrison Schwartz, Seeking Alpha

Sep. 13, 2021

 

The food industry has been greatly affected by the large ongoing global and domestic changes. Some of these changes have benefited food companies, while others have caused significant tumult. Overall, there is a growing shortage of certain food items like meat due to trade, labor, weather, and pathogenic reasons. This has caused a sharp rise in meat prices, which has benefited companies like Tyson Foods (TSN) but has also caused a significant rise in input costs.

 

The meat industry is negatively impacted by rising inflation due to the long process required to raise animals and the high labor requirement for meat processing and distribution. Animal feed, energy, and labor costs have risen significantly, creating a compounded effect on the entire meat production supply chain. Thus far, Tyson Foods has been a net benefactor since meat prices have risen more than Tyson's production costs. Additionally, many of these supply chain issues have been more pronounced in Asia due to the African Swine Fever epidemic in 2019, giving the company a major export boost.

 

That said, I believe Tyson's prospects may shift again as the current situation develops further. The company's stock fully recovered from pandemic lows but has recently undergone a significant drop lower, implying a potential reversal in its fundamental prospects. Indeed, it seems that China's food shortage issue may be ending while there is no end in sight for Tyson's labor shortage struggle. Beef and poultry prices remain extremely high by historical standards. Still, Tyson is struggling tremendously to keep up with skyrocketing input costs, and high meat prices are causing many consumers to reduce animal product consumption.

 

Overall, this situation implies TSN may decline further as its margins and sales volumes reverse. The company has immense liabilities, which give it significant downside risk in the potential event of negative profits. Finally, while the stock may seem cheap with a "P/E" of 10X today, it seems to be a potential value trap given the high likelihood of a reversal in fundamental prospects. Let's take a closer look.

 

Inflation and Labor Shortage Harms Tyson Foods ...

 

Thin Margins Make For Volatile Earnings ...

 

The Bottom Line ...  

 

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