Tyson Foods (TSN) March 7, 2018 Consumer Staples Meat Producers Stock Rating Hold

Transcription

1 The Henry Fund Henry B. Tippie School of Management Brad Sandor Tyson Foods (TSN) March 7, 2018 Consumer Staples Meat Producers Stock Rating Hold We currently recommend a Hold rating for Tyson. Recent acquisition of higher margin prepared foods companies and expected growth of overall domestic meat production set Tyson up well for modest growth in total sales. Models show a potential upside of around 10% from the current stock price. Drivers of Thesis Increased sales in the Prepared Foods segment at a CAGR of 4.7% across the forecast period will allow for overall revenue growth in the near term as per capita consumption and meat prices slump. Improved meat prices in the later part of the forecast will provide additional revenue growth. Overall meat consumption domestically is projected to rise, with per capital consumption expected to increase at a CAGR of 0.23% through the forecast period. This allows for modest additional growth in this mature industry. Recent strong financial earnings along with a downward trend in COGS shows improved cash flows. Risks to Thesis Investment Thesis Target Price $79-$83 Henry Fund DCF $81.38 Henry Fund DDM $82.25 Relative Multiple $67.19 Price Data Current Price $ wk Range $57.20-$84.65 Consensus 1yr Target $84.29 Key Statistics Market Cap (B) $26.47 Shares Outstanding (M) 365 Institutional Ownership 90.9% 52 Week Beta 0.29 Dividend Yield 1.39% Est. 5yr Growth 10% Price/Earnings (TTM) Price/Earnings (FY1) 14.9 Price/Sales (TTM) 0.67 Price/Book (mrq) 2.41 Profitability Operating Margin 8.57% Profit Margin 4.65% Return on Assets (TTM) 7.03% Return on Equity (TTM) 17.61% Tyson may not realize predicted synergies from recent acquisitions, leading to a spike in COGS. Conversely, should recent reductions in COGS as a % of sales prove to be a trend that continues, the rating may shift from Hold to Buy. Currently the assumption is that the percent of COGS to sales will rise slowly before leveling off at historic norms in Potential of a large payout from current lawsuit alleging Tyson participated in price fixing of chicken products could not only present a one-time cost but may reduce the operating margin in Tyson s second largest segment Earnings Estimates Year E 2019E 2020E EPS $3.06 $4.67 $4.94 $5.37 $5.21 $ Growth 23.3% 52.6% 5.78% 8.7% (2.9%) (5.75%) 12 Month Performance Company Description 30% 20% 10% 0% -10% TSN S&P % Source: Yahoo Finance -30% M A M J J A S O N D J F M 19.2 Important disclosures appear on the last page of this report TSN Meats Industry Source: Factset P/E ROE EV/EBITDA Tyson Foods (TSN) is a leading producer of food products headquartered in Springdale, AR and employing around 122,000 in total. The company is focused on protein and contains four main segments: pork, chicken beef, and processed foods. They sell their products to large grocers, food distributors, and restaurant chains. They operate a fully integrated chicken segment, while cattle and pork are segments are supplied with the purchase of grown livestock.1

2 EXECUTIVE SUMMARY Tyson foods operates in a mature industry with limited growth potential. Almost all of the recent growth that Tyson has experienced is the result of acquisitions. The company tries to move itself into a stronger position in the prepared foods space with brands like Hillshire Farms and AdvancePierre. Of the four segments in which Tyson operates, prepared foods is the only area that is expected to contribute to continuous growth in sales. The meat segments are expected to trend downward over the next few years as the price of meat and per capita consumption decline. The largest decline is expected in the beef segment which currently accounts for 40% of Tyson sales. Regardless, models show that total sales growth will still trend positive in all years. Nearly all new sales growth is from growth in the prepared foods segment in the near term, with rebounding meat prices and increasing per capita consumption contributing to accelerating growth in the later forecast years. Furthermore, the recent reduction on COGS as a percent of total revenue, dropping from over 91% in 2014 to under 85% in 2017, has increased operating margins, providing additional cash flow. Tyson s management expects this trend to continue with the integration of AdvancePierre. Our model shows that even with less optimistic cost controlling results with COGS returning to historic norms, Tyson has around 10% potential upside on the current market price. COMPANY DESCRIPTION Tyson Foods (TSN) is a leading producer of food products. The company is focused on protein and contains four main segments: pork, chicken, beef, and processed foods. Tyson also owns and sells protein products under such brands as Jimmy Dean, Hillshire Farms, Ball Park, and State Fair. They compete in this mature industry with other protein and packaged foods producers such as Cargill, Pilgrim s Pride, Sanderson Farms, and Smithfield Farms. Founded in 1935, Tyson is the largest publicly traded company in this industry, going public in 1947 as Tyson Feed and Hatchery and reincorporating in 1986 as Tyson Foods. 1 Recent acquisitions by Tyson have highlighted the company s strategy moving forward, capturing growth in the prepared foods segment. The company is also spinning off any non-protein prepared foods, seeking to compete only in the protein space. Tyson sells their products to large grocers, food distributors, and restaurant chains. Accounting for 17% of sales, the largest buyer is Walmart. 1 Beef Production Segments as Percent of Total Revenue (2017) Chicken Pork Beef Prepared Foods Source: TSN 10K Beef accounted for 40% of Tyson s sales in Beef is the highest priced product that Tyson produces on a per pound basis, costing over 50% more per pound than pork and 200% more per pound to consumers than chicken 4. Beef is a less vertically integrated segment at Tyson. Tyson does not raise any of the cattle that they render. The main input for this segment comes in the form of purchasing live stock on the open market. The animals are purchased from live feed lots and independent auctions. Tyson has acknowledged in their annual reports that this dependence on outside sources could result in what they term temporary imbalances in supply and demand. This segment also includes sales from miscellaneous byproducts such as hides and variety meats. Page 2

3 Based on USDA projections of consumption and beef price, we expect that this segment will see a slight increase in sales revenue of 0.15% next year followed by declines in total sales for the next 5 years at a before beginning a comeback in Our model shows a CAGR for Tyson s beef sales of -1.2% through 2025 a major concern for Tyson s largest segment. However, recent increases in the beef segment s operating margin from 2.4% in 2016 to 5.9% in 2017 indicate that Tyson may be able to maintain positive cash flow from this segment through this period. Overall, the pork segment is forecasted to see a CAGR of 1% in total revenue growth. 3.00% 2.00% 1.00% Expected Sales Growth by Segment 5.00% 0.00% Beef Year-to-Year Change Percent: Consumption & Price 0.00% -1.00% -2.00% Beef Chicken Pork Prepared Total -5.00% Price Change Pork Production Consumption Change Source: USDA Projections Pork accounted for 12% of Tyson s sales in Globally, pork is the most consumed protein. Domestically, pork has a seasonal demand, with highest sales occurring in the winter, specifically around the holidays. Inputs for this segment are live stock purchased from independent suppliers. Pork consumption nationally has increased 8% since 2014, the highest gain of any segment and production of pork has increased to meet this demand. This is in part due to a previous decline in domestic and foreign pork sales related to a virus outbreak in domestic herds that decreased demand with U.S. consumers as well as causing pork imports to be banned by several Asian countries 13. Although pork consumption per capita is expected to rise, the price of pork is expected to come down over the next few years, leaving projected sales in this segment negative for the next 2 years before returning to growth in Chicken Production Source: USDA Chicken accounted for 30% of Tyson s sales in Tyson produces broilers or chickens that are specifically raised for consumption. This is the most vertically integrated segment with Tyson and controlling all levels of production. Tyson owns grandparent breeder flocks that they use to produce parent chickens that are then distributed to Tyson s contracted chicken farms. There, the parent chickens are bred, and the broilers are raised to maturity before being sent to processing facilities. These animals are made into products for customers including raw meat, breaded chicken strips, nuggets, or patties. The input for this segment is feed, mostly corn and soybeans. Poultry was listed as the number one most desired source of protein among surveyed US consumers in 2016 and was the most consumed protein by weight in Per the USDA, the demand for chicken grew at 1.1% annually from 2005 to 2015 and is projected to grow at 1.2% annually through Based on USDA projections for consumption and price changes, we expect that sales in the chicken segment will decline in the next 3 years before rebounding in 2021 to help lead an overall sales growth rate increase 3. Across the Page 3

4 forecasted period, we expect that chicken segment revenue will grow at a CAGR of 0.4%. Prepared Foods Prepared foods accounted for 20% of Tyson s sales in Tyson produces a variety of frozen or refrigerated ready-to-eat products. Examples include sandwiches, Philly cheese steaks, hamburgers, and soups. These products are primarily sold through Tyson s owned brands such as Hillshire Farms, Ballpark, Van s, and Sara Lee. The inputs for this segment are commodity level cooking materials including pork, chicken, and beef. These inputs are sold across segments inside Tyson which are shown in the financial statements as intersegment sales. These sales reduce the total sales of Tyson and are forecasted Tyson s management has highlighted this segment as the way in which Tyson becomes a modern food company 1. Recent acquisitions by Tyson have been almost exclusively in this segment. This segment was negatively impacted in 2017 due to impairments related to an expected sale of non-protein lines. The prepared foods sales growth is expected to have the strongest sales growth of any of Tyson s segments and provide overall sales growth in the next two years. Across the forecast period, sales revenue for the prepared foods segment is expected to grow at a CAGR of 4.8% % 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2017 Profit Margin Pork Beef Chicken Prepared Foods Source: Tyson 10k RECENT DEVELOPMENTS Acquisitions and Sales On June 7 th of 2017, Tyson acquired the brand AdvancePierre. AdvancePierre is a ready to eat frozen sandwich maker. This company will go into Tyson Food s prepared foods and chicken segments. Tyson purchased the company for about $3.2 billion at $40.25 per share. This purchase added $2.9 billion to goodwill on Tyson s balance sheet. The purchase was financed with the issuance of $2.75 billion of new debt, with the remainder being paid from the company s cash reserves 1. Sales of meat snacks have grown by almost 30% in the last four years and this acquisition is Tyson s attempt to capture some of that growth 5. This acquisition also allows Tyson to potentially find a profitable use for more of their left-over scrap meat, which can be processed and sold to consumers under this line. This comes after the Hillshire acquisition in 2014, another brand that added significantly to Tyson s prepared foods segments. We expect that future acquisitions will also contribute to the prepared foods segment. Also, in 2017, Tyson announced that they would sell off several product lines including Sara Lee s, Van s and Kettle. These lines include products such as frozen desserts, waffles, soups and sauces. Management states that this sale is in line with the company s desire to focus on protein packed foods, which the company seems to define as meat only 1. Tyson Lawsuits Tyson, along with other large chicken producing companies including Pilgrim s Pride, Sanderson Farms, and Perdue Farms are being sued by grocery retailers and large food distributors for violating the Sherman Antitrust Act 1. The lawsuit alleges that Tyson, with the other companies, have used information sharing technology to collude and raise the price of chicken. Allegedly, this information was then used by the producing companies to reduce their own supplies and therefore drive up overall prices. Page 4

5 As evidence the purchasers point to a lack of any cyclical nature to the price of chicken since 2008 and the rapidly expanding profit margins at Tyson and other companies 11. The number of broiler chickens that was produced in the United States dropped by around half a billion from 2008 to % 10.00% 5.00% 0.00% -5.00% Tyson Operating Margin - Chicken Segment Operating Margin - Chicken Segment The lawsuit alleges that the main price setting index for chicken prices, The Georgia Dock, was manipulated by the producing companies to artificially raise the price at which they sold to their buyers. The Georgia Dock was suspended by state officials in late 2016 over these concerns 13. By comparing the monthly Georgia Dock Price vs. the USDA price for chicken we looked at a monthly spread between these two as a potential estimate of the damages that the buyers are seeking. We calculated the average of the monthly spread of the Georgia Dock over the USDA per year and applied this to the total sales revenue of Tyson s chicken segment as an estimate of the damages that the company could face. Average % Georgia Dock over USDA Price Tyson Chicken Segment Revenue (Millions) Source: TSN 10k Potential Damages % $8,900 $ % $9,660 $ % $10,062 $ % $11,017 $ % $10,270 $1, % $10,988 $1, % $11,116 $2, % $11,390 $ % $10,927 - This leads to a total from 2008 to 2015 of $7,466 million. The plaintiffs in this case are seeking treble (triple) damages as well as court costs, interest, and lawyer fees. Recent Financial Results On 2/08/18, Tyson announced first quarter results showing strong results and increases in sales and EPS from the same period last year. Sales increased in all four of the main segments in the first quarter of 2018 versus the same quarter in Sales overall grew from $9,182 million in Q to $10,229 million in Q an 11.4% growth. This translated into an overall net income increase from $593 million to $1,631 million. Most of the growth in net income was attributed to changes in the tax law. Tyson reported an adjusted EPS of $1.81, well above the consensus estimate of $1.51. GAAP EPS grew by 177% from Q1 of 2017, again mostly due to changes in tax law. However, adjusted EPS without tax changes still showed an increase of 14% from Q INDUSTRY TRENDS Buyer Consolidation and Power Firms that operate in this sector sell to large buyers such as grocery stores, restaurants, food distributors, the military and large box stores. These entities have consolidated in recent years, which leaves meat producers with fewer customers to sell to who hold larger buying power. For example, WalMart accounted for 24% of Conagra s net revenue and 17.3% of Tyson s consolidated sales 1,10. Both companies note in their annual reports that should this single buyer cease to do business with them, those revenues would not be replaceable. With this level of strength, it is difficult for firms in this sector to successfully pass along cost increases to their buyers. Many of these same customers operate at high efficiency levels regarding their inventory, allowing them to keep low levels of inventory on hand. Increased Production As the demand for meat has grown and is forecasted to continue to grow, firms have increased production to meet Page 5

6 demand. All segments are predicted to increase production for the next decade with the highest growth coming in the chicken segment. Canada, Central America, China, Europe, South Korea and Taiwan 1. The USDA has projected that the US exports of beef, chicken and pork will all increase over the next decade. Source: USDA This production increase comes not only from larger herds or flocks but also from the average weight of the livestock increasing, providing more meat for harvest per animal 3. Reduced use of Antibiotics Around 80% of all antibiotics are used on feed animals, which are given the drugs in consistent low doses in order to prevent illness from close-quarter living and to promote growth. Concerns around this approach contend that this allows for the development of antibiotic resistant superbugs. While the antibiotics themselves are regulated to prevent restudies from reaching consumers and do not pose a health risk, super-bugs may be transferable to humans 9. In 2017, the FDA banned the use of antibiotics for growth only purposes. However, most animals are still given low doses of antibiotics regularly for preventative purposes. Tyson has launched antibiotic free lines of both their beef and chicken products. This class of meat currently accounts for 5% of meat sold domestically but grew by 34% last year. MARKETS AND COMPETITION Foreign Markets Tyson sells its products in 117 countries across the globe. The major international markets for Tyson include: Source: USDA The main importers of US meat products are Mexico, Canada and Pacific Rim countries for beef and pork. The main importers of US chicken are Mexico and China. Projections of increased chicken demand are bolstered by the lifting of restrictions on poultry from previous HPIA outbreaks 3. There are some areas of concern for international demand especially a strong US dollar. If the dollar strengthens relative to other currencies, the importing countries may look to other sources that would offer a better exchange rate. Also, the exit of various trade deals, such as NAFTA, could complicate international trade projections and in extreme circumstances, countries could impose tariffs or ban US products outright. Tyson currently makes less than 10% of their total sales outside of the United States 2. Peer Comparisons Tyson operates in the Packaged Foods and Meats sector and competes with both public and private companies for market share. The largest private company that operates in this space is Cargill. This Minneapolis based company provides food and agricultural services. Cargill had an estimated sales total of over $100 billion in Page 6

7 Another major private competitor is Smithfield Farms. This company was previously a publicly traded company prior to its 2013 purchase by the Hong Kong firm WH Group Limited and subsequent delisting. Smithfield had an estimated $14.1 billion of sales in The major publicly traded competitors for Tyson are JBS JA, Conagra, and Hormel Total Sales ($ Billions) Tyson Conagra JBS Hormel participate in meat production through their offerings in refrigerated foods and Jennie-O Turkey. These lines account for around two thirds of their business. Conagra is a packaged foods manufacturer located in Omaha NE, that employs around 12,000 workers. They participate in meat processing through their Frozen & Refrigerated Meals and Snacks & Treats segments which combine for around 70% of total sales. The company focuses on single meal frozen offerings. Conagra had 2017 total sales of $7.8 billion. The best comparison to Tyson is Pilgrim s Pride, Hormel, and Sanderson Farms as these are the publicly traded companies that have the majority of their business in the United States. However, Tyson is much larger than these companies in both market Cap and revenue. JBS SA is a Brazilian company that operates in the same segments as Tyson; beef, pork, chicken, and prepared foods. However, JBS SA is much more heavily invested in beef than Tyson is. JBS Sales % by Segment Source: FactSet Ratio Comparison Operating Margin ROA ROIC Tyson Hormel Pilgrim's Pride Sanderson Source: FactSet Beef Pork Chicken Other Source: FactSet JBS SA owns Pilgrim s Pride, which primarily serves the United States and Mexican markets for chicken products. Hormel is a competitor for Tyson in the prepared foods segment. Hormel is a 125-year-old food service company headquartered in Austin MN. The company has around 20,000 employees and had 2017 sales of $9.8 billion in They sell grocery products and specialty goods and As we can see Tyson is behind their competitors in common ratio analysis. However, this does not capture the difference in size between Tyson and the other companies. Looking at the total debt as a percentage of total equity, we can see that there is a wide variety of capital structures across the sector. Hormel is the least leveraged with on 5.1% while Pilgrim s Pride is much higher at 145%. Tyson and Conagra fall in the middle at 96.8% and 75.1% respectively. Page 7

8 Steady Feed Prices ECONOMIC OUTLOOK The meat production industry has benefitted over the past several years from low prices on feed, corn and soybeans. Tyson identifies feed costs as 55% of the total costs of growing a chicken domestically. Conagra states that feed accounts for 29.6% of COGS. As these are major costs, the continuation of low prices is a strong positive for this sector. Currently, the USDA projects only a slight rise in these prices Projected Farm Prices Corn Soybean Source: USDA This trend of steady feed prices will not only allow Tyson to have consistency with their chicken segment but should also help to keep the prices of their beef and pork inputs consistent although to a lesser extent as these segments are not so vertically integrated. US Disposable Income & Consumer Confidence on the Rise As the economic outlook of Americans improves, consumers are more comfortable purchasing better quality meat with increasing frequency. This increase will also increase the rate at which consumers eat out improving meat producers sales to restaurants. Source: IbisWorld This increase, in conjunction with the normal population growth of the United States and the per capita increase in consumption of meat area the main drivers of growth in the beef, pork and chicken segments. CATALYSTS FOR GROWTH Tyson s ability to capture growth in the prepared foods segment is the key to their growth across the forecasted period. The successful integration of AdvancePierre and the continued growth of the other prepared food brands will be determining factors for overall revenue growth. Also, Tyson needs to continue to see good operating margins in the chicken segment as total consumption of broilers is expected to increase at a faster rate than the other meat segments. Finally, overall meat consumption driven by population growth and increasing per-capita should allow Tyson to see modest revenue growth even with volatility in meat prices. INVESTMENT POSITIVES Tyson has successfully built its offering of prepared foods. This move matches consumer preference and a growing protein snack market. Recent declines in cost of goods sold relative to sales gives Tyson enough operating margin to maintain a positive cash flow even with expected decline in the beef segment s sales. Tyson operates in four distinct segments, providing safety in diversification. Page 8

9 INVESTMENT NEGATIVES If Tyson does not grow sales of prepared foods in the short term, their overall sales will likely turn negative year-to year. Tyson may be found guilty in a price fixing lawsuit, resulting in not only a large payout but a potential operating margin reduction in their second largest segment, chicken. Tyson remains vulnerable to disease and weather events which can adversely affect their cost of inputs or depress sales in the event that the disease outbreak is in one of their meat segments. VALUATION The model valuations for Tyson are: DCF $81.38 Discounted Dividend Model $82.25 and Relative P/E $ The current stock price of Tyson is $ This indicated that the stock is undervalued. The street consensus one-year target price for Tyson is $ We believe that the DCF and Dividend Model have produced reasonable valuation results for Tyson. The Relative P/E model shows a lower valuation for Tyson, but we believe that this is not the best model as the comparison firms are either much smaller than Tyson or not primarily located within the United States. For the projected earnings estimated in this report, the future earnings were broken down into four segments: beef, chicken, pork, and prepared foods. For the three meat segments, the future sales growth was forecasted as a percent growth or decline in the per capita consumption of that meat along with the percent growth or decline in the cost of the meat year-to-year. These forecast numbers were then increased by the expected population growth in the United States 0.7%. There is a built-in assumption that the foreign market trends which will affect Tyson s sales will mirror U.S. projections. This assumption is likely conservative as emerging markets should see greater increases in consumption as larger percentages of the population enter the middle class. Tyson Projected Sales Change by Segment Beef 0.15% -0.41% -1.40% -0.35% -1.53% -0.5 Chicken -1.22% -0.53% -0.35% 0.89% 0.59% 0.3 Pork -0.41% -0.50% 0.14% 0.29% 0.27% 0.2 Prepared 1.90% 1.84% 1.74% 1.64% 1.64% 1.5 This method finds the revenue for these segments assuming that Tyson does not increase or decrease its market share. The model does not account for any future acquisitions or divestitures that Tyson may make, instead focusing on the value of the current assets. The price of COGS relative to the price of sales has been at historic lows for Tyson in 2016 and 2017 at 85.35% & 84.73% respectively. However, recent increases in the cost of shipping and wage expenses indicate that some increase is expected. Therefore, the forecasted COGS is expected to grow and return to a historical average of 87.3% over the forecast horizon. Should Tyson be able to continue to keep decreasing their COGS as a percent of sales, the valuation would increase significantly. The management has provided guidance on the CapEx expense for The expected amount is $1.4 billion 1. This is a historic high for Tyson in single year CapEx spending and 40% more than Tyson spent in Therefore, this forecast was built with 2018 as an outlier and the CapEx spending returning to a 2017 level in 2019 and then growing at the expected rate of inflation. These calculations are based on the estimates put out by the USDA for domestic prices and per capita consumption. Page 9

10 CapEx Spending ($Millions) E TSN CAP EX The CapEx level of 2017 was used as it is the most accurate reflection of how much spending is required for Tyson including its recent acquisitions. Should this prove to be too high and the needed CAP EX expense drop to historic averages, Tyson will see significant gains in future cash flows. WACC was calculated for Tyson using the yield on a 30- year U.S. Treasury Bond as a risk-free rate. The Market Rate premium that was used was 4.80% which represents a forward looking MRP based on current market conditions as calculated by Damodaran. This gave a WACC of 4.67% that was used in all years. Currently, Tyson is around 70% to 30% debt and the model keeps this ratio throughout the forecasted period. Th dividend yield was kept at a historical norm of 14% throughout the forecasted period. The yield for Tyson spiked in 2017 to close to 20%, however that was a onetime occurrence resulting from additional cash flow related to the changes in the tax law. KEYS TO MONITOR If Tyson loses the current price fixing lawsuit it could be subject to a large settlement. In addition, the increased scrutiny may lead to a reduction in the operating margin for Tyson s chicken segment. Can Tyson successfully pass any increase in their inputs along to consumers? Or will consumer retake their recent, recession times stance and consumer less meat overall? In the fourth quarter of 2017, Tyson launched a Financial Fitness Program to reduce the COGS and SGA cost of their processed foods and chicken segments. This program is expected to cost Tyson $215 million dollars. This program is predicted to save Tyson around $200 million per year through 2020, total savings being $600 million. Should the costs of this program go over projections, or the savings fail to be realized, Tyson would face a net income around 10% below current model projections 1. Finally, can Tyson sustain its recent record low levels of COGS as a percent of sales? If Tyson can continue to decrease its relative cost of goods sold or even maintain its recent gains, the company stands to realize considerable free cash flow that could fund investment or acquisitions. REFERENCES 1. Tyson 10K (2017) 2. FactSet: Tyson Financial Information 3. USDA Agricultural Projections to Statista: Sources of protein consumed by Americans Bloomberg Article: Tyson Innovation Lab Aims to Turn Scraps into Snacks 6. IbisWorld: Industry Report: Meat, Beef & Poultry Production 7. FactSet: Cargill Financials 8. FactSet: Smithfield Farms Financials 9. Forbes Article: A Plan To Reduce Antibiotic (Ab)use By The Global Meat Industry 10. Conagra 10k (2017) 11. Bloomberg Article: Chicken Producers Fall as Another Lawsuit Alleges Price Fixing 12. National Geographic: Virus Kills Millions of American Pigs, Driving up Pork Prices 13. The Washington Post: The Alleged Conspiracy to Fix the Price of Chicken Meat, Explained 14. Tyson Press Release 2/08/18 IMPORTANT DISCLAIMER Henry Fund reports are created by students enrolled in the Applied Securities Management program at the University of Iowa s Tippie College of Business. These reports provide potential employers and other interested parties an Page 10

11 example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report. Page 11

12 Tyson Key Assumptions of Valuation Model Ticker Symbol TSN Current Share Price $73.42 Current Model Date 3/1/2018 Fiscal Year End Sept. 30 Pre-Tax Cost of Debt 6.00% Beta 0.41 Risk-Free Rate 3.16% Equity Risk Premium 4.80% CV Growth of NOPLAT 0.55%

13 Sensitivity Tables BETA $ % $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ MRP 4.80% $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ SGA % Sales $ % 4.75% 4.80% 4.85% 4.90% 4.95% 5% 5.05% 5.1% 82.00% $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ COGS % Sales 85.00% $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ 9.47 $ % $ (5.50) $ (6.63) $ (7.76) $ (8.88) $ (10.01) $ (11.14) $ (12.27) $ (13.39) $ (14.52) WACC $ % $ % $ % $ % $ % $ Cost of Debt $ % 4.40% 4.45% 4.50% 4.55% 4.60% 4.65% 4.95% $ $ $ $ $ $ $ % $ $ $ $ $ $ $ % $ $ $ $ $ $ $ Cost of Equity 5.10% $ $ $ $ $ $ $ % $ $ $ $ $ $ $ % $ $ $ $ $ $ $ % $ $ $ $ $ $ $ % $ $ $ $ $ $ $ % $ $ $ $ $ $ $ 77.07

14 Tyson Revenue Decomposition Sales in Millions (Not including intersegment sales) Fiscal Years Ending Sept E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Beef $ 17,236 $ 14,513 $ 14,823 $ 14,866 $ 14,726 $ 14,197 $ 14,072 $ 13,558 $ 13,350 $ 13,180 $ 13,239 Sales Volume Change -0.3% -1.1% 1.80% 4.02% 3.57% 0.70% -1.11% -0.14% 0.36% 0.87% 0.36% Average Sales Price Change 6.9% -14.9% 0% -3.73% -4.52% -4.29% 0.23% -3.51% -1.90% -2.14% 0.08% Revenue Growth (Loss) 0.29% -0.94% -3.59% -0.88% -3.65% -1.54% -1.27% 0.44% Pork $ 5,262 $ 4,909 $ 5,238 $ 5,053 $ 4,833 $ 4,935 $ 5,109 $ 5,279 $ 5,418 $ 5,534 $ 5,659 Sales Volume Change -0.8% -2.5% 0.6% 4.58% 1.56% 0.79% 0.92% 1.11% 1.34% 1.63% 1.58% Average Sales Price Change -15.8% -4.4% 6.1% -8.11% -5.91% 1.33% 2.60% 2.21% 1.29% 0.51% 0.69% Revenue Growth (Loss) -3.53% -4.35% 2.12% 3.52% 3.32% 2.63% 2.14% 2.27% Chicken $ 11,390 $ 10,927 $ 11,409 $ 10,938 $ 11,140 $ 11,015 $ 11,354 $ 11,565 $ 11,671 $ 11,743 $ 11,835 Sales Volume Change 4.2% -2.6% 1.2% 1.58% 0.48% 1.57% 0.70% 0.70% 0.92% 0.81% 0.59% Average Sales Price Change -1.6% -1.5% 3.1% -5.71% 1.37% -2.70% 2.38% 1.16% 0.00% -0.19% 0.19% Revenue Growth (Loss) -4.13% 1.85% -1.12% 3.08% 1.86% 0.92% 0.62% 0.78% Prepared Foods $ 7,822 $ 7,346 $ 7,853 $ 8,334 $ 8,650 $ 9,255 $ 9,842 $ 10,368 $ 10,953 $ 11,486 $ 12,091 Sales Volume Change 70.7% -2.8% 3.2% 4.12% 1.80% 4.99% 4.34% 3.34% 3.64% 2.87% 3.27% Average Sales Price Change 16.7% -3.4% 3.6% 2% 2% 2% 2% 2% 2% 2% 2% Revenue Growth (Loss) 6% 4% 7% 6% 5% 6% 5% 5% Other $ 879 $ 380 $ 349 $ 384 $ 386 $ 386 $ 396 $ 400 $ 406 $ 411 $ 420 Year-to-Year Change -36.4% -56.8% -8.2% 10.09% 0.41% 0.14% 2.47% 0.97% 1.52% 1.33% 2.10% Intersegment Sales ($1,216) ($1,194) ($1,412) $ (1,153) $ (1,157) $ (1,159) $ (1,188) $ (1,199) $ (1,217) $ (1,234) $ (1,260) Year-to-Year Change -8% -2% 18% % 0.41% 0.14% 2.47% 0.97% 1.52% 1.33% 2.10% Total Sales 41,373 36,881 38,260 38,422 38,578 38,630 39,585 39,971 40,579 41,120 41,984

15 Tyson Income Statement $ Millions (Except stock values) Fiscal Years Ending Sept E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Sales 41,373 36,881 38,260 38,422 38,578 38,630 39,585 39,971 40,579 41,120 41,984 COGS 36,745 31,479 32,416 33,043 33,343 33,555 34,557 34,893 35,424 35,896 36,650 Depreciation Amortization Gross Profit 3,917 4,697 5,083 4,583 4,353 4,167 4,094 4,116 4,166 4,207 4,288 Operating Expenses: Selling, General and Administrative 1,748 1,864 2,152 1,883 1,890 1,893 1,940 1,959 1,988 2,015 2,057 Operating Income 2,169 2,833 2,931 2,700 2,463 2,274 2,154 2,157 2,177 2,192 2,231 Other (Income) Expense: Interest income (9) (6) (7) (6) (8) (42) (52) (43) (65) (75) (86) Interest expense Other, net (36) (8) Total Other (Income) Expense Income before Income Taxes 1,921 2,598 2,628 2,301 2,135 1,978 1,867 1,858 1,897 1,919 1,966 Income Tax Expense Income from Continuing Operations - Loss from Discontinued Operation, Net of Tax - - Net Income 1,224 1,772 1,778 1,841 1,708 1,583 1,493 1,486 1,517 1,535 1,573 Less: Net Income Attributable to Noncontrolling Interests Net Income Attributable to Tyson 1,220 1,768 1,774 1,837 1,704 1,579 1,489 1,482 1,513 1,531 1,569 Amounts attributable to Tyson: Weighted Average Shares Outstanding: Class A Basic Class B Basic Net Income Per Share Attributable to Tyson: Class A Basic Class B Basic Dividends Declared Per Share: Class A Class B

16 Tyson Balance Sheet Fiscal Years Ending Sept E 2019E 2020E 2021E 2022E 2023E 2024E 2024E Assets Cash and cash equivalents ,082 2,591 2,172 3,225 3,768 4,292 4,810 Accounts receivable, net 1, , , ,537 1,543 1,545 1,583 1,599 1,623 1,645 1,679 Inventories 2, , , ,978 2,990 2,994 3,068 3,098 3,145 3,187 3,254 Other current assets Assets held for sale Total Current Assets 5, , , ,142 6,846 7,362 7,061 8,162 8,779 9,370 9,995 Net Property, Plant and Equipment 5, , , ,296 6,536 6,777 7,020 7,265 7,514 7,766 8,023 Goodwill 6, , , ,324 9,324 9,324 9,324 9,324 9,324 9,324 9,324 Intangible Assets, net 5, , , ,119 5,997 5,878 5,761 5,646 5,534 5,424 5,316 Other Assets Total Assets 22, , , ,438 29,263 29,901 29,739 30,977 31,739 32,480 33,266 Liabilities and Shareholders Equity Current debt ,737 1, ,007 1,000 1,000 1,000 Accounts payable 1, , , ,614 1,620 1,622 1,663 1,679 1,704 1,727 1,763 Other current liabilities 1, , , ,441 1,447 1,449 1,484 1,499 1,522 1,542 1,574 Liabilities held for sale Total Current Liabilities 3, , , ,961 4,804 4,608 3,658 4,185 4,226 4,269 4,338 Long-Term Debt 5, , , ,626 7,665 7,701 7,774 7,826 7,888 7,949 8,025 Deferred Income Taxes 2, , , ,034 3,085 3,133 3,178 3,222 3,268 3,314 3,361 Other Liabilities 1, , , ,230 1,234 1,236 1,267 1,279 1,299 1,316 1,343 Commitments and Contingencies Shareholders' Equity: Common Stock 4, , , ,423 4,423 4,423 4,423 4,423 4,423 4,423 4,423 Retained earnings 6, , , ,355 12,820 14,177 15,458 16,732 18,033 19,349 20,698 Accumulated other comprehensive loss (90.00) (45.00) Treasury stock, at cost (1,381.00) (3,093.00) (3,674.00) (4,225) (4,804) (5,412) (6,052) (6,724) (7,431) (8,174) (8,955) Total Tyson Shareholders Equity 9, , , ,570 12,456 13,204 13,845 14,447 15,041 15,614 16,181 Noncontrolling Interests Total Shareholders Equity 9, , , ,588 12,474 13,222 13,863 14,465 15,059 15,632 16,199 Total Liabilities and Shareholders Equity 22, , , ,438 29,263 29,901 29,739 30,977 31,739 32,480 33,266

17 Tyson Cash Flow Statement Forecast Ammounts in Millions Fiscal Years Ending Sept E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Cash Flows From Operating Activities: Net Income 1,837 1,704 1,579 1,489 1,482 1,513 1,531 1,569 Depreciation Amortization Change in Accounts Receivable 138 (6) (2) (38) (15) (24) (22) (35) Change in Inventory 261 (12) (4) (74) (30) (47) (42) (67) Change in Accounts Payable (84) Change in Other Current Liabilites Deferred Income Taxes Cash Flow from OPS 3,021 2,631 2,532 2,433 2,474 2,525 2,574 2,628 Change in other Current Assets (12) (1) (0) (6) (2) (4) (3) (5) Change in net assets held for sale 803 Change in other assets 116 (2) (1) (14) (6) (9) (8) (13) CAP Ex (1,400) (1,000) (1,030) (1,061) (1,093) (1,126) (1,159) (1,194) Cash Flow from Investing (493) (1,003) (1,031) (1,080) (1,101) (1,138) (1,170) (1,212) Long Term Debt (1,671) Current debt (200) (1,026) 496 (7) - - Other Liabilities Dividends (258) (239) (222) (209) (208) (212) (215) (220) Repurchase of common stock (551) (579) (609) (640) (672) (707) (743) (781) Changes in common stock + add paid in cap Cash Flow from Financing (2,449) 57 (992) (1,771) (320) (845) (880) (898) Net Change in Cash 79 1, (419) 1, Beginning of year Cash ,082 2,591 2,172 3,225 3,768 4,292 End of year Cash 397 2,082 2,591 2,172 3,225 3,768 4,292 4,810

18 Tyson Cash Flow Statement Fiscal Years Ending Sept Cash Flows From Operating Activities: Net Income ,224 1,772 1,778 Adjustments to reconcile net income to cash provided by operating activities: Depreciation Amortization Deferred income taxes 140 (12) (105) (39) Loss on early extinguishment of debt Convertible debt discount - - (92) - Loss on dispositions of businesses - - (177) - - Impairment of assets Share-based Compensation Other, net 18 (10) (20) 71 (34) (57) (Increase) decrease in accounts receivable (69) (126) (93) (55) (Increase) decrease in inventories (259) 15 (148) (246) Increase (decrease) in accounts payable 106 (12) 202 (162) (130) 61 Increase (decrease) in income taxes payable/receivable 8 80 (133) 177 (19) 55 Increase (decrease) in interest payable 5 (1) 5 (23) (1) 16 Net changes in other operating assets and liabilities (38) (27) (8) 19 Cash Provided by Operating Activities 1,187 1,314 1,178 2,570 2,716 2,599 Cash Flows from Investing Activities: Additions to property, plant and equipment (690) (558) (632) (854) (695) (1,069) Purchases of marketable securities (58) (135) (18) (38) (46) (79) Proceeds from sale of marketable securities Acquisitions, net of cash acquired - (106) (8,193) - - (3,081) Proceeds from sale of businesses Other, net Cash Used for Investing Activities (660) (643) (8,800) (270) (684) (4,164) Cash Flows from Financing Activities: Payments on debt (993) (91) (639) (1,995) (714) (3,159) Proceeds from issuance of long-term debt 1, , ,444 Borrowings on revolving credit facility - - 1,345 1,065 1,810 Payments on revolving credit facility - - (1,345) (765) (2,110) Proceeds from Issuance of Debt Component of Tangible Equity Units Proceeds from issuance of common stock, net of issuance costs Proceeds from issuance of equity component of tangible equity units - - 1,255 - Proceeds from issuance of commercial paper ,138 Repayments of commercial paper (7,360) Payment of AdvancePierre TRA Liability (223) Purchases of Tyson Class A common stock (264) (614) (295) (495) (1,944) (860) Dividends (57) (104) (104) (147) (216) (319) Stock options exercised Other, net (7) 18 (23) Cash Provided by (Used for) Financing Activities (171) (600) 6,915 (2,035) (2,377) 1,530 Effect of Exchange Rate Change on Cash (1) 3 - (15) 6 4 Decrease in Cash and Cash Equivalents (707) 250 (339) (31) Cash and Cash Equivalents at Beginning of Year 716 1,071 1, Cash and Cash Equivalents at End of Period 1,071 1,

19 Tyson Common Size Income Statement Fiscal Years Ending Sept E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Sales % % % % 100% 100% 100% 100% 100% 100% 100% 100% COGS 91.44% 88.81% 85.35% 84.73% 86.0% 86.4% 86.9% 87.3% 87.3% 87.3% 87.3% 87.3% Depreciation 1.31% 1.47% 1.67% 1.68% 1.75% 1.97% 2.04% 2.07% 2.12% 2.16% 2.21% 2.23% Amortization 0.10% 0.25% 0.24% 0.31% 0.32% 0.32% 0.31% 0.30% 0.29% 0.28% 0.27% 0.26% Gross Profit 7.14% 9.47% 12.74% 13.29% 11.93% 11.28% 10.79% 10.34% 10.30% 10.27% 10.23% 10.21% Operating Expenses: Selling, General and Administrative 3.34% 4.22% 5.05% 5.62% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% 4.90% Operating Income 3.81% 5.24% 7.68% 7.66% 7.03% 6.38% 5.89% 5.44% 5.40% 5.37% 5.33% 5.31% Other (Income) Expense: Interest income -0.02% -0.02% -0.02% -0.02% -0.02% -0.02% -0.11% -0.13% -0.11% -0.16% -0.18% -0.20% Interest expense 0.35% 0.71% 0.68% 0.73% 1.00% 0.82% 0.82% 0.81% 0.81% 0.80% 0.80% 0.79% Other, net 0.14% -0.09% -0.02% 0.08% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% Total Other (Income) Expense 0.47% 0.60% 0.64% 0.79% 1.04% 0.85% 0.77% 0.73% 0.75% 0.69% 0.66% 0.63% Income before Income Taxes 3.33% 4.64% 7.04% 6.87% 5.99% 5.53% 5.12% 4.72% 4.65% 4.67% 4.67% 4.68% Income Tax Expense 1.05% 1.68% 2.24% 2.22% 1.20% 1.11% 1.02% 0.94% 0.93% 0.93% 0.93% 0.94% Net Income 2.28% 2.96% 4.80% 4.65% 4.79% 4.43% 4.10% 3.77% 3.72% 3.74% 3.73% 3.75% Less: Net Income Attributable to Noncontrolling Interests -0.02% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% Net Income Attributable to Tyson 2.30% 2.95% 4.79% 4.64% 4.78% 4.42% 4.09% 3.76% 3.71% 3.73% 3.72% 3.74%

20 Tyson Common Size Balance Sheet Fiscal Years Ending Sept E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Assets Cash and cash equivalents 1.66% 0.95% 0.83% 1.03% 5.40% 6.71% 5.49% 8.07% 9.28% 10.44% 11.46% Accounts receivable, net 3.92% 4.18% 4.38% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% Inventories 6.96% 7.41% 8.47% 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% Other current assets 0.47% 0.72% 0.57% 0.60% 0.60% 0.60% 0.60% 0.60% 0.60% 0.60% 0.60% Assets held for sale 0.00% 0.00% 2.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Current Assets 13.01% 13.25% 16.36% 13.38% 17.75% 19.06% 17.84% 20.42% 21.63% 22.79% 23.81% Net Property, Plant and Equipment 12.51% 14.02% 14.55% 16.39% 16.94% 17.54% 17.73% 18.18% 18.52% 18.89% 19.11% Goodwill 16.11% 18.08% 24.37% 24.27% 24.17% 24.14% 23.55% 23.33% 22.98% 22.68% 22.21% Intangible Assets, net 12.49% 13.78% 16.32% 15.93% 15.55% 15.22% 14.55% 14.13% 13.64% 13.19% 12.66% Other Assets 1.39% 1.52% 1.76% 1.45% 1.45% 1.45% 1.45% 1.45% 1.45% 1.45% 1.45% Total Assets 55.52% 60.66% 73.36% 71.41% 75.85% 77.40% 75.13% 77.50% 78.22% 78.99% 79.24% Liabilities and Shareholders Equity Current debt 1.73% 0.21% 2.37% 2.36% 4.50% 3.98% 1.29% 2.52% 2.46% 2.43% 2.38% Accounts payable 4.02% 4.10% 4.44% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% 4.20% Other current liabilities 2.80% 3.18% 3.72% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% Liabilities held for sale 0.00% 0.00% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Current Liabilities 8.54% 7.49% 10.54% 10.31% 12.45% 11.93% 9.24% 10.47% 10.41% 10.38% 10.33% Long-Term Debt 14.44% 16.81% 24.30% 19.85% 19.87% 19.94% 19.64% 19.58% 19.44% 19.33% 19.11% Deferred Income Taxes 5.92% 6.90% 7.79% 7.90% 8.00% 8.11% 8.03% 8.06% 8.05% 8.06% 8.01% Other Liabilities 3.15% 3.37% 3.13% 3.20% 3.20% 3.20% 3.20% 3.20% 3.20% 3.20% 3.20% Commitments and Contingencies 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Shareholders' Equity: Class A Common Stock 0.08% 0.10% 0.10% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Convertible Class B Common Stock 10.51% 11.92% 11.56% 11.51% 11.47% 11.45% 11.17% 11.07% 10.90% 10.76% 10.54% Capital in excess of par value 0.02% 0.02% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Retained earnings 10.41% 11.81% 11.44% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Accumulated other comprehensive loss 16.47% 22.63% 25.55% 29.55% 33.23% 36.70% 39.05% 41.86% 44.44% 47.06% 49.30% Treasury stock, at cost -0.22% -0.12% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04% Total Tyson Shareholders Equity -3.34% -8.39% -9.60% % % % % % % % % Noncontrolling Interests 23.42% 26.05% 27.55% 30.11% 32.29% 34.18% 34.97% 36.14% 37.07% 37.97% 38.54% Total Shareholders Equity 0.04% 0.04% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.04% 0.04% 0.04% Total Liabilities and Shareholders Equity 23.46% 26.09% 27.60% 30.16% 32.33% 34.23% 35.02% 36.19% 37.11% 38.02% 38.58%

21 Tyson Value Driver Estimation Millions Fiscal Years Ending Sept E 2019E 2020E 2021E 2022E 2023E 2024E 2025E NOPLAT Calculation Revenue ,422 38,578 38,630 39,585 39,971 40,579 41,120 41,984 -COGS ,043 33,343 33,555 34,557 34,893 35,424 35,896 36,650 -SGA ,883 1,890 1,893 1,940 1,959 1,988 2,015 2,057 -Depreciation Amortization Implied Interest on Operating Leases EBITA Marginal Tax Rate 41.9% 37.7% 37.6% 24.50% 24.50% 24.50% 24.50% 24.50% 24.50% 24.50% 24.50% Income Tax Provision Tax Shield on Interest Expense Tax on Interest Income Tax Shield on Other Expense (Income) Tax Shield on Non-Operating Leases Less: Total Adjusted Taxes Deferred Tax Liability 2,449 2,545 2,979 3, , , , , , , , Previous Year Deferred Tax Liability 2,450 2,449 2,545 2, , , , , , , , Change in Deferred Taxes (1) NOPLAT Invested Capital Computation Operating Current Assets Normal Cash Accounts receivable, net 1,620 1,542 1, Inventories 2,878 2,732 3, Other current assets Operating Current Liabilities Accounts payable 1,662 1,511 1, Other current liabilities 1,158 1,172 1, Net Operating Working Capital PPE 5,176 5,170 5,568 6, , , , , , , , Long Term Assets PV of Operating Assets , , , , Intangible Assets, net 5,168 5,084 6,243 6,119 5,997 5,878 5,761 5,646 5,534 5,424 5,316 Other Assets Other Operating Assets 6,544 6,340 7,672 7,557 7,471 7,387 7,317 7,243 7,174 7,107 7,048 Other Liabilities 1,304 1,242 1,199 1, , , , , , , , Invested Capital NOPLAT ΔIC FCF (NOPLAT - ΔIC) NOPLAT Begin IC ROIC (NOPLAT / Begin IC) 16% 19.75% 15.73% 14.15% 12.98% 12.20% 12.07% 12.06% 12.00% 12.08% Begin IC ROIC - WACC 11% 15% 11% 9% 8% 8% 7% 7% 7% 7% EP (Begin IC) * (ROIC-WACC)