Join Hedgeye's Consumer Staples Team – led by Sector Head Howard Penney – for a review of their SHORT thesis on Tyson Foods (TSN). This call will take place on Tuesday June 27, at 1pm ET.
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The SHORT thesis centers around the company's unsustainable margin profile, potential legal troubles the company may be facing, and the replacement of the CEO, coupled with a fast and furious rebranding effort that has raised some red flags.
KEY DISCUSSION POINTS:
1) POSSIBLE LEGAL TROUBLES:
- USDA's Farm Bill Provision: Provisions by the Grain Inspection, Packers and Stockyards Administration (GIPSA) could favor farmers and hurt TSN. The "tournament system" currently in place puts all of the risk in the hands of the farmers, forcing them to bear the burden of the volatility in the business.
- Attention from Florida's Attorney General: TSN is now at the forefront of the Florida Attorney General's Civil Investigative Demand (received on March 1, 2017) due to alleged price manipulation unfairly benefiting TSN and others from cutting supply.
2) FUNDAMENTALS APPEAR TO HAVE PEAKED:
- Gross Margin Hits 16% in 1Q17: TSN's margin profile has ramped over the past 8 years, with gross margin reaching 16% in 1Q17 and showing unparalleled stability and growth.
- This success has been built on the backs of struggling chicken farmers. The introduction of USDA's "Actively Engaged" Farm Bill Provision, safety net payments that TSN has been receiving from farmers under contract could come to an end -- potentially crippling the Company's business model.
3) STRATEGIC MOVES DISTRACTING FROM ISSUES THEY FACE:
- Smoke Screen Distracting Investors: In our view, you can create a smoke screen to distract investors by conducting business accretive deals, management changes, or a re-branding effort.
- In 2014, they acquired and consolidated Hillshire Brands Company.
- In November 2016 Tom Hayes was named CEO, and then the company rounded-out its re-branding effort with a new logo in Feb 2017.
- Another acquisition was announced in April 2017 -- AdvancePierre Foods Holdings Inc. for $3.2B in cash.
- Such large announcements in quick succession raise red flags.
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