A Tasty Food Business at a Relatively Low Price

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Tyson Foods (NYSE: TSN) has experienced a considerable gain in the past 12 months, up more than 92.8%, beating the S&P 500’s increase of only 22.7% during the same period. Recently, Tyson Foods received more bullish momentum in the market, with a nice rise of more than 4.1% in just one trading day to reach around $29.70 per share. The bullish market sentiment was due to the company's impressive third-quarter earnings results. Is Tyson Foods a good buy now? Let’s take a look and find out.

An impressive third quarter

In the third quarter of 2013, Tyson Foods experienced good growth in both its top and bottom lines. Revenue increased from $8.3 billion in the third quarter of last year to more than $8.7 billion in the most recent period. Net income jumped more than threefold, from $76 million to $249 million. The significant rise in net income was due to a much lower interest expense, falling from $215 million last year to only $36 million this year.

The company's adjusted EPS came in at around $0.68, which was 33% higher than the adjusted EPS of $0.51 last year. In the third quarter, Tyson Foods experienced higher volume in both its chicken and beef segments, with 4.4% and 3.8% growth, respectively, but declining volume of 4.7% in the pork segment. The reduction in pork sales volume was due to the balancing between the company’s supply with customer demand and reduced exports.

Tyson Foods has returned as much as $100 million in cash to shareholders via a share buyback. Tyson Foods’ president and CEO Donnie Smith is bullish about the company, saying, “We produced strong earnings of $0.69 per share while investing in our people, processes and new businesses and continuing to buy back stock. Our chicken segment achieved record operating income, and our beef segment rebounded to generate solid returns.”

Potential future growth along with global population growth

Its next significant debt maturity is scheduled for October of this year; $458 million of 3.2% convertible senior notes. However, it is not a big concern for the company, as its current liquidity is much higher at $2 billion. Tyson is trading at around $29.70 per share, with a total market cap of $10.5 billion. The market values Tyson at only 6.9 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization).

In fiscal 2014, Tyson Foods expects to grow overall domestic protein production (chicken, pork, turkey and beef) by around 1%. It also expects lower input costs and reduced costs for cattle and hog producers thanks to favorable weather conditions with a more ideal planting environment. These conditions could raise next year's grain supplies. Its adjusted sales might increase by 3% to 4%, with EPS growth staying at around 10%.

Tyson owns a valuable product portfolio, with the market-leading position in the chicken, beef and pork industry in the U.S. Tyson has 21% market share in the U.S. chicken market, 26% in the beef market and 17% in the pork market.

The world will need 100% more food than the current production in the next 40 years, with the current population growth rate of 75 million people per year. With the global leading position, Tyson seems to be well positioned for the growing food demand.

The lowest valuation compared to its peers

Compared to its peers, including Smithfield Foods (NYSE: SFD) and ConAgra Foods (NYSE: CAG), Tyson Foods is the most cheaply valued among the three. Smithfield was recently trading at $33.40 per share, with a total market cap of $4.6 billion. The market values Smithfield at 9.2 times its trailing EBITDA. Smithfield is one of the largest producers of fresh- and packaged-meat products globally. Recently, a Hong Kong-based holding company, Shuanghui International, offered to acquire Smithfield at around $34 per share for a total value of $7.1 billion.  

However, activist fund Starboard Value believes the offering price was inadequate. With sum-of-all-parts analysis, Starboard Value believes that Smithfield’s equity value should be in the range of $7.1 to $9 billion, valuing the company at around $44 to $55 per share, a decent premium of 29% and a 62% premium to Shuanghui’s offer. 

The current price represents a good arbitrage opportunity for investors. If Shuanghui’s offer materializes, investors could get a good gain of 1.8% in the next several months. However, if the acquisition does not materialize, investors could also benefit in the long run by holding on to Smithfield. With Smithfield's global market leading position and the involvement of Starboard Value, there could be great returns ahead.

ConAgra has the highest valuation of these companies. Recently trading at $37.20 per share, ConAgra has a $15.6 billion market cap. The market values ConAgra at 12.2 times its trailing EBITDA. What might make investors excited about ConAgra is the potential synergies it has with its recent acquisition of Ralcorp, a leading private-brand food-products supplier. 

After the acquisition, ConAgra will have a more balanced product portfolio, with around 43% of its total revenue expected to come from the branded segment. The commercial/food-service group is expected to rank second, and to account for 32% of total revenue, while the private-branded segment will likely represent 25% of total sales. 

Moreover, ConAgra will become one of the largest packaged-food companies in North America. It also becomes the leading company in the private-label food sector. Moreover, ConAgra could take advantage of Ralcorp’s existing efficient sales channels and price points, enhancing the company’s position in attractive and fast-growing food segments, such as: snack nuts, pasta and peanut butter. ConAgra acquired Ralcorp at around 11 times EBITDA, much higher than Smithfield's valuation at only 9.3 based on Shuanghui's offer. 

My Foolish take

Tyson Foods seems to be a good stock for long-term investors due to its market- leading position, impressive growing operating performance and low valuation. I also like ConAgra because I personally think that it will deliver a nice return to its shareholders in the long run as a consequence of the potential synergies from the Ralcorp acquisition.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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