1

Krause Fund Research

Fall 2016

Consumer Staples Recommendation: HOLD

Analysts

Gyuho Chad Cha chagyuhochad@gmail.com

Mengjiao Yu mengjiao-yu@uiowa.edu

Company Overview

Tyson Foods, Inc. (TSN) is an American multination

company founded in 1935. Its headquarters is located in

Springdale, Arkansas and operates in the food processing

industry. The company is the largest meat processor with

subsidiaries including Jimmy Dean, Hillshire Farm, Sara Lee,

State Fail, Ball Park, and Wright. In 2014, the company

acquired Jimmy Dean and Ball Park and sold its poultry

businesses to its competitor, JBS S.A. for $575 million to

focus on the domestic market. As of the end of fiscal year of

2015, it hires more than 113,000 employees and operates 123

facilities.

Stock Performance Highlights 52 week High $77.05

52 week Low $48.52

Beta Value 0.66

Share Highlights Market Capitalization $25.16 b

Shares Outstanding 297.45 m

EPS (ttm) $4.11

Forward P/E Ratio 13.81

Dividend Yield 0.9%

Dividend Payout Ratio 13.3%

Company Performance Highlights ROA 8.19%

ROE 16.82%

Sales (Fiscal Year 2015) $41.37 b

Operating Margin (Fiscal Year 2015) 5.2%

Operating Margin (3Q 2016) 9.6%

Quarterly Earnings per Shares

Date

Reported EPS

EPS

Forecast

%

Surprise

11/23/2015 0.83 0.9 -7.78%

2/5/2016 1.15 0.87 32.18%

5/9/2016 1.07 0.96 11.46%

8/8/2016 1.21 1.07 13.08%

Source: Nasdaq

Tyson Foods, Inc. (NYSE: TSN)

December 2, 2016

Current Price: $56.12

Target Price: $59.00 – $65.00

Enhanced Operating Margin with

Pending Lawsuit

Adjusted EPS in 3Q 2016 was increased by 51% from Q3

2015. Tyson Foods also increased full 2016 ESP guidance from

$4.40 - $.50 to $4.47 - $4.57

Total sales had been declined compared to the previous 3Q,

but operating income was increased by 36%.

Beef segment showed signs of recovery. The beef segment

reported -0.2% operating margin in Q3 2015 and it was increased

to positive 2.4% in Q3 2016.

Although chicken sales had been decreased, its operating

income was increased due to the enhanced operating margin. Its

operating margin was increased from 11.4% in 3Q 2015 to 13.9%

in 3Q 2016.

Pork Segment recorded the highest increase in operating

margin in Q3 2016. Its operating margin was 5.3% in Q3 2015

and increased to 9.6% in Q3 2016.

Pending lawsuit of chicken price fixing is assumed to have a

great impact on Tyson’s stock price. Its operating income for

chicken sector has been adjusted.

One Year Stock Performance as of 12/2/2016

Source: Bloomberg

45

50

55

60

65

70

75

80

2

EXECUTIVE SUMMARY

We recommend to hold Tyson Foods stock due to recent lawsuit

of chicken price fixing. The lawsuit alleges that chicken price is

manipulated by producers in U.S. including Tyson Foods. Even

though Tyson Foods has been tried to reduce its dependency on

chicken sector but still the chicken sector accounts for the biggest

operating income among four major business sectors. We adjusted

the operating margin in chicken sector and lowered the target

price.

ECONOMIC OUTLOOK

We believe there are five key economic drivers that affect the

consumer staples sector. They are gross domestic product,

unemployment rates, consumer confidence, interest rates, and

inflation.

Gross Domestic Product

Gross Domestic Product (GDP) is the total monetary value of

goods and services produced within a nation’s borders in a given

time period. GDP functions as an indicator of economic health.

Typically, when the nation's GDP increases so does the S&P 500,

as indicated in the graph below.

GDP vs SP500

Source: Bloomberg

Currently, Consumer Staples is one of the most expensive areas

as market has been defensive for last four years, and it is also a

non-cyclical sector, which means their stock prices tend to do well

when GDP lags and when GDP is strong. 1 This is because their

products typically have a low-price elasticity of demand.

However, there are enough substitutes that suppliers have

difficulty raising prices. Instead they must focus on differentiating

their products. During times when GDP and the overall economy

are strong, name brands tend to do better than private labels.

When GDP is lower and the overall economy doesn’t perform

well, the reverse is true. We saw these trends after great recession

as private label spending decreased 10% from 2009-2012.2

GDP Growth Rate

Source: FRED

Since the great recession, GDP has been on a slow, but positive

growth trajectory, as seen in the graph above. In the third quarter

of 2016, real GDP rose to an annualized rate of 2.9% from 1.4%

in the second quarter.3 We expect GDP to increase at a

conservative rate of about 2.1% over the next 3 years.

Unemployment

Unemployment, similar to GDP, is one of the first indicators of

economic health. As mentioned above, consumer staples tend to

be in high demand regardless of economic strength thanks to the

necessity of their products (e.g. food, beverages). However,

consumers will shift their spending to low-cost private label

brands as unemployment increases.

The graph below shows US civilian unemployment levels over

the previous 10 years. Since the great recession, unemployment

has been cut by more than half and now lies at 4.9%.4 As

unemployment falls, wages tend to increase. According to

Bloomberg, wages increased by 0.4% in July of 2016, which

allows for increased consumption of consumer staples, especially

name brand goods. We expect unemployment to remain around

4.9% over the next 6 months, with a slow drop to 4.75% in the

longer term. With the decreasing of unemployment rate, the

consumer power will relative has an increase, which will increase

the sale of our sector.

Unemployment Rate

Source: FRED

Consumer Confidence

The consumer sentiment index is based on a phone questionnaire

of 5000 U.S. citizens to gauge the health of the U.S. economy

from the point of view of the average person. Each caller answers

950

1150

1350

1550

1750

1950

2150

2350

14000

15000

16000

17000

18000

19000

1/4/2010 1/24/2012 2/12/2014 3/3/2016

GDP SP500

3

questions on three economic categories: their own situation, their

view on the short-term economy and their view on the long-term

economy. It is created to assess the near-term customer outlook

on personal finance and household spending. The data collected

in this poll is used to help evaluate the level of consumer optimism

or pessimism. The stock market is effected by the data from this

index either negatively or positively. If consumer sentiment has

increased, it means that consumers are optimistic about the health

of the U.S. economy and will spend more money on discretionary

goods. This is usually a good thing for the stock market. If

consumer sentiment has decreased, it means that the average

consumer is pessimistic about the future of the U.S. economy

which usually results in a decrease in the overall stock

market. However, changes in in consumer sentiment have a

minimal effect on the price of stocks in the consumer staples

sector as consumers tend to buy staple products regardless of the

economic environment.

Historically, the consumer sentiment survey has been a bit of a

lagging variable behind the general market trend. Looking at the

graphs below it is visible to see that the index generally falls

below 100 during times immediately following large drops in the

stock market and in the period right after as people are

more cautious about their discretionary spending. As noted

in earlier, consumer sentiment does not have a large influence on

the price of consumer staples stocks due to the necessity of the

goods purchased at any time during the business cycle. That is

confirmed by looking at the below graph which shows that when

the consumer index was above 100, consumer staples prices were

primarily stagnant, and following the financial crisis consumer

staples increased in value although consumer sentiment was

low. Currently, the consumer sentiment survey as of November is

91.6, which means that the average U.S. citizen is pessimistic

about the direction of the economy.

Consumer Sentiment Survey vs SP500

Source: University of Michigan

Barring sudden changes to the overall trend the market has shown,

we forecast that consumer confidence will continue to rise as the

consumer confidence index continues above 100 in the zone of

economic optimism, we would expect that the consumer staples

index to begin to stagnate as we saw between the years of 1998

and 2008. As consumers become more optimistic in the economy

and spend more in other sectors of the economy, investors will

flock to those other areas.

Interest Rates

The Federal Reserve has the ability to change the interest rates at

which commercial banks can borrow money from them. By

changing this rate, the Fed can increase or decrease the supply of

money in the economy, which has an immediate effect on

inflation and slight lagging effect on GDP growth. If commercial

banks are able to borrow money more cheaply, it means that they

are able to lend it to consumers at a lower rate as well. This entices

consumers and businesses to borrow money to make big

purchases like cars, houses or capital investments, which is bene-

ficial for the economy. Because of the benefits this brings to the

economy, when the Fed decreases the federal funds rate, the stock

market will usually increase. Due to the low betas of consumer

staples companies, a decrease in the federal funds rate has a

positive, yet lesser influence on the price of those stocks. This is

true especially because a lower interest rate generally influences

more long-term investments, which are generally not considered

staples.

In response to the general market outlook does the FOMC change

rates. If they believe that the economy is growing too rapidly, then

they will raise rates to attempt to reduce the supply of money in

the marketplace to reduce capital investment and vice versa if the

economy is slowing. Historically especially in recent decade, the

federal funds rate was lower than 5%, especially, since the great

recession the FOMC has set the rate at record lows. In 2015, Fed

rate was raised from 0% to 0.25%. In response to these all-time

lows the market, and the consumer staples sector has been

growing incredibly quickly. The S&P 500 has even reached a new

all-time high. As we've seen in the past from a rising stock market,

it is expected that the Fed will increase rates to attempt to slow

down the growth of the economy. Although there has been much

speculation during last few months' meetings, the Fed has

generally kept the rate the same amidst global economic

uncertainty. Currently the effective federal funds rate stands

at 0.5%

Federal Funds Rate vs SP500

Source: Bloomberg

4

Consumer Stapes vs Federal Funds Rate

Source: Bloomberg

Due to the most recent FOMC meeting and speech regarding their

proposed intentions, there is much speculation about another rate

hike in the near future. Albeit a small rate hike is most likely to

occur in the next few months, the markets are already trying to

price in the effect that such a hike would do to the bottom lines

for the companies of the U.S. market. We are expecting an

incremental hike in the next few months. This will have an effect

of decreasing the rate at which the S&P 500 has been increasing

as well as the rate at which the consumer staples companies have

been trading. If a rate hike were to occur, firms would be paying

more for capital investments and consumers will be paying more

in interest rates for things like cars and houses. Due to

this, we expect a small decrease in the rate at which the consumer

staples sector has been increasing at 0.75%

Inflation

Inflation is the rate at which the general level of prices for goods

and services is rising, and, consequently, the purchasing power of

currency falling.5 Consumer Price Index (CPI) and Producer Price

Index (PPI) are both measures of inflation. The CPI represents a

weighted average price of a basket of consumer goods and

services. CPI is the most reliable indicator of inflation and is under

close watch as it shows that inflation is at a 16-year low.6

According to the U.S. Bureau of Labor Statistics report, over the

last 12 months, the CPI inflation rate rose 0.8 percent before the

seasonal adjustment.7 When the inflation rate rises, the purchasing

power of currency is falls. When there is a moderate inflation rate

which is between 0%-2%, a higher CPI is better for the consumer

staples sector. CPI will influence the cost of our sectors a lot. With

the CPI increased, the inventories cost will increase, in order to

keep profitable, consumer staples companies will increase their

product price as well. If the price only rises up a little and the

demand for customers will not be significantly influenced, the

companies will realize higher profit. If there is an uncontrolled

increasing inflation rate, the price of goods is sustained growth,

the demand of customers will decrease. All in all, the net profit of

companies will have a negative influence.

Source: Bureau of Labor Statistics

The PPI is a family of indices that measure the average change in

selling prices received by domestic producers of goods and

services in the three stages of production: crude goods,

intermediate goods, and finished goods.8 Because PPI is reported

before CPI, it can show signs of inflation before the CPI index.

PPI is important because it affects the input costs, which affects

selling price and revenue. A lower PPI is better for the consumer

staples sector because it signifies lower input costs, thus leading

to higher margins and higher revenues. From Chart 1 below, we

can see that the total final demand and total final demand for

goods is -0.4%. This decrease is largely attributable to the total

final demand for food falling -1.1%. 9 These data show that the

input costs are reduced for most consumer staples companies.

One-month percent changes in selected PPI final demand

price indexes

Source: Bureau of Labor Statistics

We expect that in 6 months the CPI inflation rate will decrease to

0.5% because we believe the Federal Reserve is likely to raise the

interest rate by the end of the year. However, in 2-3 years we

believe the CPI inflation rate will steadily increase to 1.8%, which

will be close to the Federal Reserve target of 2%.

CAPTIAL MARKET OUTLOOK

We believe that the market will grow at a rate of 2.1% over the

next 2-3 years. The consumer staples sector would benefit from

the low growth rate since it is considered a relatively safe asset

-1

-0.5

0

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Sep

'15

Oct

No

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Dec Jan

Feb

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Ap

r

May Jun

Jul

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per

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ange

Final demand Final demand goods Final demand Service

5

compared to other sectors. The demand for consumer staples is

inelastic and constant because consumers are unlikely to change

their budget for food. Since consumer staples have a low beta of

.68 historically, it is always preferable to be included to diversify

portfolios.10 This sector can mitigate the loss during recession and

even make profits by adjusting its volume due to its high dividend.

We believe it is a good time to invest in consumer staples since

the risk tolerance of investors has decreased over years of market

fluctuations. The consumer staples sector will not outperform the

market going forward since the economic variables show that the

market is in recovery. Since the demand for consumer staples is

inelastic and not well-correlated to the market, its performance

would not benefit from the recovering market as much as other

sectors.

INDUSTRY ANALYSIS

Industry description

Food Products is an industry within the Consumer Staples sector,

it holds 20% weighting (based on market capitalization) of

consumer staples. Food Products is comprised of two sub-

industries: agricultural products and packaged foods & meat.11

The agricultural products include crop growers, owners of

plantations and companies that produce and process foods but do

not package and market them. The packaged foods & meat is

producers of packaged foods including dairy products, fruit

juices, meats, poultry, fish and pet foods.

Source: NetAdvantage

Industry Trend

As consumers become more concerned about their health, food

industry shifts its focus on organic foods. Organic food market

has been growing fast recently and it is expected to grow

continuously 14% by 2018.12 The biggest challenge to companies

in Food Product industry is that they need to balance the cost of

producing organic food with the profit and access to enough

supply of organic inputs. Companies have focused more on fewer

items and established the brand names to outrival their

competitors.

Commodity Price Risk Management

The meat processing companies are exposed to commodity price

risk since it is the main component of the cost of goods sold.

Below are the lists of companies which directly compete with

Tyson Foods and how they manage the commodity price risk.

Tyson manages this risk through the use of derivative

financial instruments, foreign currency risk, and interest

risk. 13 They also operate own farms and enter long term

contracts with suppliers to reduce the uncertainties about

the future price.

Pilgrim periodically seeks to enter into purchase

commitments or financial derivative but has not

designated the derivative financial instruments to

mitigate commodity price risk.14

Sanderson Farms periodically enter into contracts to

purchase feed ingredients but it doesn’t use derivative

financial instruments or purchase market risk sensitive

instruments. 15

Consumer Demographics Trend

Hispanics

The population of Hispanics in U.S. is growing faster than any

other non-Hispanics. Their home dinning trend started to have

influence on the food product industry. Companies have released

Hispanic packaged food to attract the fast-growing population.

Aging Baby Boomers

The aging baby boomer generation is concerning more about

healthy food. They are concerned about low saturated fat,

cholesterol, and sodium and high in whole grains, protein, and

calcium.16 Also, they are substituting red meat with other protein

food products since read meat is closely related to heart disease

and cancer. The market must follow this changing trend of the

aging baby boomers since there are 76 million estimated living in

the U.S. today.17

Red Meat Sales vs Poultry Sales in U.S.A

Source: USDA

Agricultural Products,

2%

Household Products,

19%

Brewers, 1%

Distilers & Vintners, 2%

Drug Retail, 9%

Food Distributors,

1%

Food Retail,

3%

Hyper Markets &

Super Centers , 9%

Packaged Foods &

Meats, 17%

Personal Products,

2%

Soft Drinks, 20%

Tobacco, 17%

Consumer Staples Sector Breakdown

6

Smaller Households

Consumers have become more individualized in the U.S.

Currently, more than 50 percent of eating and beverage occasions

happen when consumers are alone.18 Also, 27 percent of

consumers are dining alone according to the Census Bureau.19 The

individualized consumer group has affected the food industry and

has had forced the packaged food industry to adjust their products

in response to the new trend. In 2015, Tyson had successfully

caught the trend increasing its packaged foods sales from 3.9

billion in 2014 to 7.8 billion.20

Packaged Food Revenue Changes

Source: Euro monitor & Fact Set

Porter’s Five Forces Analysis

Industry Rivalry

The food products industry has $453,839 of total market cap as of

4/13/2016. In 2015, Kraft Foods and H.J. Heinz merged and

formed the largest company in the food products industry with

Kraft Heinz, the largest company, merged with holding a 21%

weighting. The second largest company is Mondelez International

with 14.5% weighting. The top 10 largest companies account for

a combined 78.4% market share in the food products industry.21

Food Products: Major Players as of 4/13/2016

Source: NetAdvantage

Threat of New Entrants: Medium and Steady

The new company must pass the approval from the U.S.

Department of Agriculture and Environmental Protection Agency

to start business. Both departments have a strict standard to

protect and promote public health.22 Also, since preexisting

companies in Food Product industry made the long-term contract

with suppliers, it is difficult for newly entered companies to find

the new suppliers. Tyson Foods has entered long term contracts

with various independent farmers. It had made more than 3,800

contracts for chicken, 3,770 for beef, and 2,100 for port in 2015.23

Threat of Substitutes: High

The treat of substitute is high in this industry since the market is

fully saturated. Customers can easily find substitutes for Tyson

Foods’ products in the stores. Even though the food products are

differentiated but they are still substitutable by other products. To

reduce the threat, Tyson Foods has focused on establishing the

brands name. Their brand strategy is using the merged company’s

brands to maintain the relationship with existing customers.

Bargaining power of buyers: High

The buyers have more power since there are many substitutions

are available in the market. Customers often demand for lower

price or healthier food and if Tyson Foods cannot meet their

requirements at right time, its customers will switch to other

brands without any additional cost.

Bargaining power of suppliers: Low

To reduce the power of suppliers, Tyson Foods has made long

term contracts with suppliers. Since Tyson Foods is the largest

meat processing company, the suppliers have less power to

negotiate. According to Tyson Foods, the average length of the

contracts is 15 years which makes it have more bargaining power

than other competitors such as Sanderson Farms and Pilgrims

which enter long term contracts only periodically.24

Catalysts for Growth/Change

Consumer demand

According to the World Databank, the population of USA keeps

0.8% growth rate in recent years, and 1.2% in world. The

increased number of people means that he sales of food especially

of necessaries like meats will grow as well.

Population Growth: U.S. vs World

Source: World Development Indicators

Furthermore, the consumption of middle class and rich people in

emerging markets such as India and China keep increasing and

predict to increase more in future. After the election of US in

0

2000

4000

6000

8000

10000

320.

330.

340.

350.

360.

370.

2011 2012 2013 2014 2015

Gross Market Value (B)

Tyson's Package Foods revenue (MM)

Others, 22%

Kraft Heinz, 21%

Mondelez Internation

al, 15%General

Mills, 8%

Kellogg, 6%

Tyson Foods, 6%

Archer-Daniels-Midland,

5%

Hormel Foods, 5%

Conagra Foods, 5%

Hershey, 4%

Campbell Soup, 4%

7

2016, the tax is expected to be decrease and will increase the

purchase power of middle class.

Shares of Global Middle Class Consumption, 2000-2050

Source: World Bank

Food safety and health

People have high attention to the food safety all the time.

According to a survey, consumers now link health, wellness, and

industries transparency with their definition of safety, and include

factors such as free from harmful ingredients (62%); clear and

accurate labeling (51%); and fewer ingredients, processing, and

nothing artificial (42%).25 The food products industry is

comprised of agricultural products and packaged foods & meat,

which means this industry is much more likely to be impacted by

consumer concerns. If there is an exposure that shows food is

unsafe, this kind of scandal will affect sales dramatically.

Today, the health and nutrition for food is another key selection

criterion for people. For example, the organic food becomes a

popular and profitable business. More and more traditional food

companies such as General Mills are trying to diversify their

portfolios to organic and natural food. In addition, more and more

people becomes vegan or vegetarian. In 2009, a tiny one percent

of the US population reported eating vegetarian or vegan. In

2015, 5% of the United States population is vegetarian and half of

those people are vegan, and the number is keep rising. However,

veganism is not just for women. The outcome consumption of

meat because of the increasing number of vegetarian will

decrease.26

Emerging market

Established markets still generate high profits for package food &

meat companies. However, because of the high economic

development of Latin American and Asian Pacific countries, these

countries also can bring profits for food product industry.

Emerging markets are relatively underfed and the population in

emerging market is huge. In countries like India and China, cheap

labor force and plentiful farmland are the favorable conditions for

the food products industry companies to expand.27

Investment positives and negatives

Positive

The food products industry is a relative mature industry in

consumer staple sector. Food industry provides the necessities

through its product diversity. Because food is a daily consumption

for people, most of the time it will not be serious influenced by

the economy. The food products industry historically produces

gross margins in the 18%–26% range (22.7% average from 2006

to 2015). Normalized net income for the food products industry

increased 40.0% between 2005 and 2015 and rose at a CAGR of

3.4%. Food products industry interest coverage improved from a

10-year low of 4.1x in the third quarter of 2006 to a high of 9.6x

in the fourth quarter of 2013.28 This stable growth and ample

interest coverage makes the food products industry the safe choice

for the investors during major economic and stock market

downturns.

Negative

Although the food products industry is a relatively stable market,

some uncontrolled situations also will influence its growth. For

example, agricultural products reduce on its harvest if there is

harsh weather due to climate change. Furthermore, food product

industry is a mature industry, so it is difficult for companies to

have great innovation and prompted sharp rising of stock prices.

Financial Statistics of Leading Competitors in Food

Product Industry

Tyson JBS SA Sanderson Pilgrim's Hormel

Market Cap 28.03B 9.68B 2.12B 5.35B 19.34B

ROA 8.19% 4.57% 10.60% 15.54% 12.49%

ROE 16.82% 9.14% 12.97% 47.63% 20.02%

EPS 4.11 0.42 6.24 1.84 1.54

Revenue Per

Share

97.47 38.21 121.96 31.51 17.56

Profit Margin 4.28% 1.10% 5.19% 5.85% 8.96%

Operating

Margin

7.86% 4.00% 8.21% 9.49% 13.41%

P/E 17.84 17.03 15.08 11.42 23.73

P/S 0.73 0.18 0.79 0.66 2.08

P/B 2.86 1.37 1.86 6.56 4.4

Total Cash

Per Share

0.53 1.91 10.76 0.16 0.72

Source: Yahoo Finance

Profit margin and Operating margins are the most important

statistics to evaluate the companies in Food Product industry since

the market is fully saturated. If the firm cannot generate revenue

efficiently, it can operate business in long run. So the except JBS

SA, four companies in the table above are in our investment list.

They have succeeded to differentiate from other competitors and

increased operating margin in the highly competitive market.

8

COMPANY ANALYSIS

Company Overview

Tyson Foods, Inc. is an American Corporation operates as a food

company worldwide with leading brands such as Tyson, Jimmy

Dean, Hillshire Farm, Sara Lee, Ball Park, Wright, Aidells and

State Fair. The company was established by John W. Tyson in

1935.29 In 2001, it had expanded its business segments by

acquiring IBP, Inc. which had the largest market share in beef

packer and the second in pork processor business in the U.S to

expand the business segment. In 2014, Tyson acquired the maker

of Jimmy Dean sausage and Ball Park hot dogs for $8.5 billion.30

In July 2014, the company sold its poultry business in Mexico and

Brazil to focus on the domestic market.31 It generated $40.6

Billion in the fiscal year of 2015 with 113,000 employees.

Its main four business segments are Chicken, Beef, Pork and

Prepared Foods. The company raises and processes chicken

products; process live cattle and live hogs; and fabricates beef and

pork carcasses into meat cuts. The company produces from fresh,

value-added food to frozen and refrigerated food products.32 The

products are primarily sold to grocery retailers, grocery

wholesalers, meat distributors, warehouse club stores, military

commissaries, industrial food processing companies, chain

restaurants or their distributors, live markets, international export

companies and domestic distributors who serve restaurants, food

service operations such as plant and school cafeterias,

convenience stores, hospitals and other vendors. 32

Product Lines, Raw Materials, and Sources of

Supply

Source: Fact Set

Source: Tyson 10Q 2016

Chicken

Tyson processes live chickens into fresh, frozen and value-added

chicken products. Chicken products are distributed domestically

to food retailers, wholesalers, food service establishments such as

schools, the military and other food processors, as well as to

international markets.32 Since it raises chicken itself, chicken

products are less volatile than other segments. This segment is

also expected to grow faster since consumers are replacing red

meat which is linked to heart diseases and other health issues. As

of 3Q 2016, chicken segment had recorded the highest operating

income and margin among the four business sectors.

Tyson Foods has focused on reducing its exposure to the price

fluctuation of chicken from suppliers. To reduce this risk, Tyson

Foods has entered long term contracts with farmers. Other

competitors such as Sanderson Farms and Pilgrims only enter the

contracts periodically since their market caps are much smaller

than Tyson’s.33 The average length of the contracts is 15 years

which guarantee the stable chicken supply at the fixed price.

However, the dependency on chicken products is expected to

decrease going forward because it is assumed that the recent

pending lawsuit will affect the chicken sector. The lawsuit claims

that consumers have been paying 50% more because of artificially

manipulated price. The operating margin for chicken sector is

adjusted to be lower.

Beef

The company processes live cattle and fabricates dressed beef

carcasses into primal and sub-primal meat cuts and case-ready

product. 32 This product is also distributed throughout the same

distribution channel as chicken segment. The beef segment of

Tyson Foods is more volatile than chicken since its supply is

dependent on independent contractors. To reduce the volatility,

the company has entered risk-sharing and procurement

arrangements with suppliers. 32

As of Q3 2016, Beef food products account for the largest

percentage of the sales but it had recorded the lowest operating

margin among the four segments. The beef segment is highly

sensitive to price change since even a slight increase in price

makes consumers shift away from beef to chicken or lower-priced

meats according to Tyson Foods CEO Donnie Smith.34 However,

41% 43% 41% 39%

35% 30% 27% 29%

9% 10% 19% 19%

15% 17% 13% 13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016 - 3Q

Sales by Segment from 2013 to 3Q 2016

Beef Chicken Prepared Foods Pork

0

50

100

150

200

250

300

350

400

0%

2%

4%

6%

8%

10%

12%

14%

16%

Beef Chicken PreparedFoods

Pork

2016 3Q Operating Income & Margin

Operating Income Operating Margin

9

it is operating income had increased from $ -7 million in 3Q 2015

to $91 million in 3Q 2016. The beef segment is expected grow at

2% in Q4 2016.

Pork

Tyson processes live hogs and fabricates pork carcasses into

primal and sub-primal cuts and case-ready products.32 This

product is also distributed throughout the same distribution

channel as chicken and beef segment. Pork segment has lower

volatility than beef segment does since it has more secured

suppliers. It employs hog buyers who make purchase agreements

of various time durations as well as purchase hogs daily. 32 Also,

it raises a small number of swine for its processing needs.

As of 3Q 2016, pork products account for 13% of the sales and it

is expected to increase in 2016. In last year, the demand for pork

was strong and volume was up 3.1% compared to 2014. 35 Tyson

has expanded its pork food product variations by acquiring

Hillshire Company and increased its hog supplies in 2016. The

operating margin is expected to be above its normalized range at

around 10%. 35

Prepared Foods

Throughout acquisitions, Tyson has increased its Prepared Foods

products variations. Tyson announced its plan to reduce its

dependence on shrink-wrapped fresh meats and invest more in

packaged-food products to follow the trend.36 As shown above in

the Sales Segment table, its sales had been almost doubles from

2014 to 2015. Tyson had successfully followed the new trend of

smaller households so the growth rate is expected to grow

constantly even though it was stabilized in 3Q 2016.

New Products

Tyson’s success is dependent on anticipating changes in

consumer preferences and dietary habits and successfully

developing and launching new products and product extensions

that consumers want.32 One of the ways of developing new

products is acquiring an existed company. In September 2016,

Tyson Foods plans to launch an extension of the Hillshire

snacking platform and roll out the Tyson Naturals line of frozen

chicken products, which feature all-natural ingredients and no

antibiotics ever.37 The new products reflect changes in consumer

trend since consumers are more concerned about organic food and

replacing red meat which causes heart diseases. Also, Tyson

Foods announced to work with Amazon Fresh on a new line of

meal kits called Tyson Taste Makers.38 The new product has high

quality which consumers cannot easily substitute it so the demand

is less sensitive to the price fluctuations. Also, the new product is

distributed only throughout e-commerce grocery service which

would reduce its high dependency on the wholesalers such as

Wal-Mart and the distribution cost.

Corporate Strategy

In 2016, Tyson Foods has expanded a new business sector. It has

introduced True Chew, a line of beef, chicken, and ham-flavored

dog treats to penetrate pet food market.39 However, it is expected

to generate only small portion of revenue, since it is still in

fledging.

Also, Tyson has expanded its product lines by acquisitions. One

of the key acquisitions was Hillshire Brands which is expected to

create synergies of about $700 million in fiscal 2017.40

Tyson Foods also has more facilities compared to its meat

processing competitors. Tyson Foods has a lower transportation

cost per food products and high market share since their facilities

are located close to highly populated areas and outnumber the

competitors.

Tyson Foods Facilities Locations in U.S.A.

Source: TysonFoods.com

Sanderson Farms Facilities Locations in U.S.A.

Source: SandersonFarms.com

Recent Earnings Release

In 3Q 2016, Tyson Foods generated sales of $9,403 million and

operating income of $767 million. Although volume had

decreased from previous 3Q, port sales had increased in fact

because of its increased price.

10

Sales Changes from 3Q 2015 to 3Q 2016 Sales Volume

Change

Avg. Price

Change

2016 2015

Beef 3783 4305 2.90% -14.60%

Chicken 2743 2757 -0.90% 0.40%

Prepared

Foods

1809 1810 1.90% -1.90%

Pork 1271 1207 -1.70% 7.20%

Source: Tyson 10Q 2016

The chart below shows the operating income changes from 3Q

2015 to 3Q 2016. Operating income is more accurate indicator to

evaluate performance of each segment since sales do not include

the cost.

Operating Margin/Income Changes

from 3Q 2015 to 3Q 2016

3Q Operating

Income

Operating Margin

2016 2015 2016 2015

Beef 91 -7 2% 0%

Chicken 380 313 13.90% 11.40%

Prepared

Foods

197 207 10.90% 11.40%

Pork 122 64 9.60% 5.30%

Source: Tyson 10Q 2016

Beef segment shows a negative number in 3Q 2015 which means

that as Tyson operates business in beef industry, it loses its

money. The main reason of the negative number is the imbalance

between supply and demand of feeder cattle in 2015. Compared

to chickens and hogs, feeder cattle take more time to be grown

enough to be processed. This leads to the reduced sales volume of

beef segment and the increased price of beef made consumer shift

to chicken or other protein sources.

Loss in beef segment is not just Tyson’s problem. JBS SA, the

leading company in beef industry in U.S. also suffered loss of

$37.3 million for the fourth quarter of fiscal 2015. Since the

market is still too big to be ignored, the two major companies

likely compete each other to survive. However, they would focus

on cost-efficiency rather than increasing the volume.

Feeder Cattle Price Changes from 2014 to 2016

Source: Bloomberg

However, 2016 is expected to be different from 2015 since the

balance of feeder cattle has been stabilized. In 3Q 2016, Tyson

recorded a positive operating income in beef segment. Tyson has

announced its improved marketing strategy and branding plan for

beef. 41 One of its solutions to survive in beef market is Tyson

Taste Makers, a line of chef-inspired meal kits for home delivery

with Amazon Fresh service.42 This product includes uncooked

meat ingredients which are fresher and healthier. However, it

would not dramatically boost the profits in beef segment since e-

commerce for food market is in its early stage.

Chicken segment is the real cash cow to Tyson Foods. Even

though its sales are less than beef segment’s, its operation income

was $380 million in 3Q 2016 which accounts for about 50% of

the entire operation income of Tyson Foods. Chicken is the most

lucrative segment with 13.9% of operating margin. Tyson will

likely continue to make profits by focusing on chicken segment in

4Q 2016.

Prepared Food is a rising business segment in Tyson Foods. This

segment has accomplished a remarkable success with $588

million of operating income in 2015 compared to $60 million

losses in 2014. Tyson has successfully caught up the consumer

trend by expanding prepared product variations throughout

acquisitions. Prepared Food is expected to bring profits to Tyson

in 4Q 2016.

Tyson will face fierce competition in pork segment as more pork-

processing plants get built, including some funded by hog farmers

group.43 Tyson has invested in raising more hogs to stabilize the

supply. The operating margin had increased from 5.3% to 9.6% in

3Q 2016. The port segment is expected to grow more since its

high price and enhanced operating margin.

Competition

Tyson Foods has intense competition with other food producers

and processors. The competition among Tyson Foods and its

competitors are about the price, food quality, innovation, safety,

convenience, long term contract and brand identification.

Compared to other food producers and processors, Tyson Foods

has more advantages. For example, Tyson Foods is able to change

based on the consumer preferences and dietary habits successfully

develop and launch new products.

The major competitors of Tyson Foods are Pilgrim’s Pride

Corporation, Hormel Food, Sanderson Farms, Mondelez

International and ConAgra Food. In general, Tyson Foods is the

second best among these competitors from market capitalization.

The market capitalization of Tyson Foods is 28.03 billion, which

is only lower than Mondelez Intl but higher than other

competitors. In 2015, they have the highest revenue and gross

profit among these competitors. However, the profit margin and

operating margin are the second lowest, which means Tyson

Foods has relative low profitability. In addition, Tyson Foods

owned more stable labor contract and customer contract than

competitors. For example, Wal-Mart accounted for 16.8% of

Tyson sales in fiscal 2015. Except Wal-Mart, Tyson also has long

term contract with a lot of fast-food restaurant like, KFC, Taco

Bell, McDonald’s, Burger King. Tyson Foods also have a stable

supplier contract, for example, it has more than 6000 independent

contract farms to grow chickens.

0

50

100

150

200

250

300

11

Research and Development

Tyson Foods currently has 173 research and development team

members to work together for innovation, consumer product

analysis, fulfilling emerging consumer needs and planning the

future of packaging for protein as they are developed. With

100,000 square foot research and development facility and 19

research kitchens and a USDA-inspected pilot plant, Tyson Foods

can work better to improve product development, to automate

manual processes in our processing plants and grow out

operations, and improve chicken breeding stock.44

Catalyst for growth and change

Livestock disease

One major threat for the Tyson Foods is outbreak of a livestock

disease (such as avian influenza [AI] or bovine spongiform

encephalopathy [BSE]). In 2015, with the bird flu out broke,

Tyson Foods Inc., as the largest U.S. chicken producer, the stock

price fell the most in nine months after bird flu had been found

and reported. These diseases will not only decrease the consumer

confidence, but also destroy the brand image. Moreover,

decreasing of sales could lead the stock price to decline as well.

Health

Because the major products of Tyson Foods are chicken, beef and

pork, health is an important concern of consuming meat.

Continuing global concern about the wellness and health becomes

an important factor that influences Tyson’s sales. In addition, with

the increasing number of vegetarian and vegan customers, the

sales of meat may also decline. As we can see the following chart

about the red meat and poultry retailing, the consumption of red

meat which will cause a series of disease like cardiovascular

diseases and have high calories was decreased from 2006 to 2016.

Source: USDA, Economic Research Service

Emerging market

Emerging markets are both a challenge and opportunity for Tyson

Foods. It wants to open the market in China and India, but it is a

big challenge. In 2015, Tyson Foods finally sold meat production

operations in Mexico and Brazil to JBS. S.A.

Although Tyson Foods had loss in Brazil and Mexico market, it

has better performance in China by successfully understanding

the market. Demand for pork is the highest in China, and people

normally prefer to buy meat in the local market where sell freshly

butchered livestock rather than processed meat in a cooler. For

this reason, international companies have problems to penetrate

the Chinese market. Tyson Foods uses high technology that can

help people know where the livestock was slaughtered and when

the meat arrived in the store cooler.45 In China, a country with

many food safety problems, this action made people have more

confidence in Tyson Foods.

The problem in international market is that revenue is affected by

the currency exchange rate. To reduce the volatility of currency

problem in international market, Tyson Foods has bought

currency derivatives to hedge the foreign exchange risk.

Pending Lawsuit

Tyson Foods and other chicken producers are accused of the

chicken price fixation in October 8, 2016. Even though Tyson

Foods disputes the collusion, the lawsuit is highly convincing.

The graph above shows that the price had increased abnormally

from 2012 to 2013. It is highly likely that Tyson Foods had been

enjoying manipulated operating margin from chicken sector.

After the lawsuit was announced, the stock price was decreased to

$67.5 from $74.05.

Key investment positives and negatives Positives

The beta of Tyson Foods is 0.66, which means its

security is theoretically less volatile than the market. So

it helps decrease the portfolio standard deviation since it

is less affected by the market movement.

Tyson Foods hedges the commodity and interest risk by

entering long-term contract and buying derivatives.

Therefore, Tyson Foods can be a safe security in the

portfolio can give a steady profit.

The operating income has increased from 3Q 2015 to 3Q

2016. Tyson Foods shows the signs of recovery.

Negatives

The food products industry is relatively low profitable

and already in the mature stage, it is difficult to make a

huge profit by investing in Tyson Foods stock.

Its low beta can be a weakness when the market is in

strong performance.

Its debt rate is high compared to its competitors due to

acquisitions in 2014 and 2015. Even though it hedged

12

the interest risk by purchasing derivatives, Tyson has

still exposure to interest risk.

The lawsuit against Tyson Foods of chicken price

fixation decreased the stock price. The operating margin

for the chicken sector has been adjusted since it had been

increased abnormally since 2015. Also, the lawsuit is

highly likely against Tyson Foods which its sentence will

decrease the stock price again.

VALUATION ANALYSIS

Revenue

We decomposed Tyson’s revenue into four segments: chicken,

pork, beef and prepared food. Our revenue forecast is based on

the 10Q of the first three quarters in fiscal 2016 and economic

outlook. In order to predict 2016 revenue, we analyzed three 10Qs

of Tyson Foods. The sales volume had decreased in the previous

9 months due to the loss in Mexico and Brazil. Since Tyson Foods

doesn’t operate in Mexico and Brazil anymore, the sales volume

is expected to grow again in Q4 2016 and 2017.

Although total sales had been declined, the operating income had

been increased to enhanced operating margin. Operating income

had been increased from $563 in 3Q 2015 to $767 in 3Q 2016.

Even though we forecast the that the total revenue will be

decreased by 7.15% compared to the fiscal year of 2015, the

company is not in a bad shape in terms of operation.

Quarterly Total Sales Q1 Q2 Q3

2015 10,817 9,979 10,071

2016 9,152 9,170 9,403 Source: Tyson 10Q 2016

Quarterly Operating Income Q1 Q2 Q3

2015 509 547 563

2016 776 704 767 Source: Tyson 10Q 2016

As shown in the above tables, Tyson Foods had increased its

operating margin every quarter, so they had increased operating

income in fact. Therefore, we decided our target price based on

DCF model since it uses free cash flow generated by operating

income. Examining total revenue is not the right method to judge

the stock price of Tyson Foods.

Cost

Cost of goods sold The cost of goods sold in Tyson Foods showed a decline trend

since 2012, which had been decreased from 92.21% of sales to

88.45%. From 10Q of the third quarter, Tyson Foods reported that

the cost of goods sold was only 86.99% of sale in previous nine

months of fiscal 2016.

Overall, the operating margin has been enhanced in all four

business sectors but we have adjusted its COGS to 88% due to

pending lawsuit against chicken price fixation. The lawsuit is

highly likely against Tyson Foods so we have increased the

COGS.

Research and Development

According to the Q3 2016 Conference Call, Tyson Foods said it

is going to continue to invest heavily in innovation, new product

launches. We predict that the research and development cost of

Tyson will be increased every year. We forecast Tyson will spend

0.18% of sales in 2016 and 0.2% of sales in 2017 and will increase

0.02% of sale per year later.

Operating Income

We forecast the operating income of Tyson Foods will increase to

6.66% of sales by the end of fiscal 2016. Through the 10Q 2016

of Tyson, compared to last year, the operating margin increased

in each segment. In chicken segment, the operating margin of

previous 9 months in 2016 was13.4%, beef was 1.9%, pork was

11.4% and prepared food was 10.9%.

However, operating income of year 2017 is likely affected by the

pending lawsuit. Since the lawsuit is highly convincing, the

COGS is adjusted to be highly. Although other business sectors

show that their operating margin has been increased, chicken

sector still accounts for the largest proportion in operating income.

Debt

In 2014 that Tyson had an acquisition with Hillshire

Brands which made the sales of prepared food doubled in 2014

and 2015. However, it also created $7,535 million long term debt

in 2014 and $6,010 in 2015. Through the analysis of 10K of

Tyson, we saw that the most of debt in Tyson will be due later

2020. Therefore, we forecasted the long-term debt of Tyson will

still be a large amount. We calculated the long-term debt by

calculating the average rate of long term debt to total asset in

previous 2 years and then adjusted it by adding 3%.

Weighted Average Cost of Capital (WACC)

The weighted average cost of capital (WACC) estimation is

consisted of equity and debt in Tyson.

Cost of equity (Re)

We used the Capital Asset Pricing Model (CAPM) to estimate the

cost of equity. We used 30 Year Treasury Bond rate as risk free

rate, which was 2.93%. We used 7.93% as market rate of return.

For the Beta, in Bloomberg, we found the 1-year, 3-year and 5-

year beta for daily, weekly and monthly. Because daily returns are

often noisy and monthly returns are less volatile, we take monthly

returns as our choice and got 0.66 as our beta. Through the

calculation, we got the cost of equity is 6.23%, and the weight of

equity is 74.33%.

Cost of debt (Rd)

We used 30 years cooperate bond rate from FINRA as our pre-tax

cost of debt which was 4.31%. We used 41.9% as our marginal

tax rate, so we got the after-tax cost of debt is 2.47%. By adding

the operating leases, long-term debt and current portion of long-

13

term debt, we got total value of debt, which is $7,154 million and

the weighted of debt is 25.67%.

Through the calculation of weighted average cost of capital, we

estimated our WACC is 5.27%.

Discounted Cash Flow Model and

Economic Profits Model (DCF & EP)

In discounted cash flow model and economic profits model, we

calculated CV growth first and got 0.21%, since it was lower than

GDP, we used 2.1% which a little bit higher than GDP as our CV

growth. We take 2020 as our continuing value year. The

NOPLAT, Invested Capital and cost of equity are the major

factors influencing our share price, through these we got the CV

ROIC and WACC to calculate the free cash flow and economic

profit in 2020 CV.

Because of the acquisition in 2014, Tyson Foods had large amount

of debt in 2016 and future years we predict. After we got value of

operating asset, through adding value of non-operating asset and

reducing the value of debt, ESOP and other, we got the value of

equity and share price. The discounted cash flow and economic

profit model we have provide us the stock price of TSN will be

$62.24, and the adjusted price to 2 December 2016 is $62.63.

We have decided DCF model is the most accurate indicator for

Tyson Foods stock price since its calculation is based on the free

cash flow. Tyson is expected to generate more free cash flow since

its operating margin has been increased, although its total sales

had been declined. The stock price of Tyson Foods as of

12/2/2016 is $56.12 which is undervalued by 12% compared to

DCF model.

Dividend discounted model (DDM)

The intrinsic stock value of Tyson Foods provided by dividend

discount model is $63.29, and the adjusted price is $63.69. We got

P/E multiple, which is 19.85 through CV growth, CV ROE and

cost of equity. The EPS we used from the net income divided by

basic weighted average shares. Because we forecast that the net

income and shares outstanding will have a stable increasing, we

got a relative higher EPS, which was 3.89 in 2020. Tyson’s

dividend per share increased since 2011, which is 0.16 in 2011

and increased to 0.45 in 2015. We predict that the dividend would

continue to increase in next five years, which would be 0.6 in

2015, and increased 0.05 each year in future 5 years. Then we

used dividend discounted model to this the intrinsic value.

However, DDM model doesn’t provide any useful information

about Tyson Foods, since its dividend yield is too low. The current

dividend yield of Tyson Foods is 0.9% which is considerably low

compared to the food industry average dividend yield of 2.49%.46

Relative P/E Valuation

Since there are not enough direct competitors for a relative P/E

valuation, the industry has been expanded to the overall food

products industry. The 7 companies have been selected for the

valuation test and two companies have been deleted

P/E Valuation Candidates

Ticker

Company

Market Cap

(Billion)

CAG ConAgra Foods, Inc. 15.29

CPB

Campbell Soup

Company 16.45

GIS General Mills, Inc. 36.1

HRL Hormel 18.41

HSY The Hershey Company 20.73

K Kellogg Company 25.39

KHC Kraft Heinz Company 98.89

MKC McCormick Non Vtg 11.54

SAFM Sanderson Farms 1.89

Source: Yahoo Finance

Kraft Heinz company is deleted since its market cap is too larger

than other competitors. Sanderson Farms is also deleted since it

has the lowest market cap and the lowest P/E ratio. The target

prices of the P/E valuation for 2016 and 2017 are $80.58 and

$78.16 respectively. The prices are modestly different from the

forecasted price of DCF and EP models since this model expanded

its industry from the meat to overall food processing. Since the

meat industry has only few private companies to compare, we

determined this forecasted price of the P/E valuation is less

accurate than the DCF and EP calculation.

SENSITIVITY ANALYSIS

We included sensitivity analysis to find out the impact of changes

in two variables on the stock price. The four sensitivity tables

show the changes in two variables in each scenario below.

Marginal Tax Rate & Pre-Tax Cost of Debt

The industry average of Debt to Equity ratio in consumer

discretionary in 2015 was 0.1. The Debt to Equity ratio of Tyson

Foods in 2015 was .69 which is unusually high compared to

competitors. The company had aggressively expanded its

businesses by acquisitions in 2014 and 2015, so the pre-tax cost

of debt rate is an important variable to measure the stock price of

Tyson Foods. Another variable related to pre-tax cost of debt is

marginal tax rate. Since the new president promised a huge cut in

the corporate tax rate, this sensitivity analysis table shows how

the tax rate affects the stock price. The 3% decrease in the

marginal tax rate would increase the stock price by about $5

assuming Cost of Debt is constant.

Equity Risk Premium & Beta

Since Tyson Foods had increased its debt to acquire Hillshire

Brands, the company beta had been affected by its changed cost

structure. The goal of this analysis is to find out how much the

14

stock price can be affected by the changes in beta assumption and

the market which is equity risk premium.

Equity risk premium and beta are two main variables to show how

sensitive the stock price of Tyson Foods is to the market.

If the beta is decreased by .02, the stock price will be increased by

about $2 holding ERP constant. Likewise, if ERP is decreased by

2%, the stock price will be increased by about $3.

COGS/Sales Ratio & Continuing Value Growth

Rate

Since food processing industry is facing a low operating margin,

even a small decrease in COGS/sales help them survive in the

highly-saturated market. In 2015, Tyson Foods had invested its

capital to increase operating margin especially in beef and pork

sector. We forecasted its COGS/Sales will be 88% and did a

sensitivity analysis test to show how the stock price is changed by

the COGS/Sales ratio. Continuing Value Growth rate will help to

understand more about the free cash flow changed by the

COGS/Sales ratio since it is the major valuable to calculate CV of

Free Cash Flow. The 20-basis-point increase in CV Growth rate

will increase the stock price by about $3 holding the COGS/Sales

rate constant. Conversely, the 20-basis-point decrease in the

COGS/Sales rate will increase the stock price by about $4 holding

the CV Growth rate constant.

Continuing Value ROIC & WACC

The return on invested capital tells how efficient the company

uses its invested capital. Since Tyson Foods has increased its

invested capital in 2015, we did a sensitivity analysis test to show

how the CV ROIC rate affects the stock price. WACC is another

major variable to the DCF model calculation since the calculated

free cash flow is discounted by WACC. If the CV ROIC is

increased by 1%, the stock price will be increased by about $2

holding WACC constant. Conversely, if WACC is increased by

10-basis-point, the stock price will be decreased by about $3

assuming CV ROIC constant.

Important Disclaimer This report was created by students enrolled in the Security

Analysis (6F:112) class at the University of Iowa. The report was

originally created to offer an internal investment recommendation

for the University of Iowa Krause Fund and its advisory board.

The report also provides potential employers and other interested

parties an example of the students’ skills, knowledge and abilities.

Members of the Krause Fund are not registered investment

advisors, brokers or officially licensed financial professionals.

The investment advice contained in this report does not represent

an offer or solicitation to buy or sell any of the securities

mentioned. 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 Krause Fund may hold a financial interest in the

companies mentioned in this report.

15

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does-not-fit-all/10192

28 Netadvantage

29 Tyson Foods. (2015). Annual report 2015. Retrieved from http://ir.tyson.com/investor-

relations/financial-reports/annual-reports/

30 McCracken, J., & Welch, D. (2014, June 9). Tyson Said to Win Hillshire Bidding, Beating Pilgrim's

Pride. Retrieved September 20, 2016, from http://www.bloomberg.com/news/articles/2014-06-

08/tyson-said-to-win-bidding-for-hillshire-beating-pilgrim-s-pride

31 Baertlein, L. (2014, July 29). Tyson to sell Mexico, Brazil poultry businesses to JBS. Retrieved

September 20, 2016, from http://www.reuters.com/article/us-tyson-foods-results-

idUSKBN0FX0UR20140729

32 Tyson Foods. (2015). Annual report 2015. Retrieved from http://ir.tyson.com/investor-

relations/financial-reports/annual-reports/

33 Pilgrim’s Pride (2015). Annual report 2015. Retrieved from

http://ir.pilgrims.com/sec.cfm?view=all, Sanderson Farms (2015). Annual report 2015. Retrieved from

http://ir.sandersonfarms.com/sec.cfm?view=all 34 Souza, K. (2014, December 30). Beef industry faces higher prices, lower margins and shrinking

demand - Talk Business & Politics. Retrieved September 20, 2016, from

http://talkbusiness.net/2014/12/beef-industry-faces-higher-prices-lower-margins-and-shrinking-

demand/

35 Nunes, K. (2016, May 10). Tyson Foods shifting into overdrive. Retrieved September 20, 2016,

from http://www.foodbusinessnews.net/articles/news_home/Financial-

Performance/2016/05/Tyson_Foods_shifting_into_over.aspx?ID={113B1435-0D2C-4DF6-9A46-

8393DCDE40AF

36 Jamerson, J. (2016, August 8). Tyson, Helped By Prepared Foods, Beats And Raises Outlook.

Retrieved September 20, 2016, from http://www.foxbusiness.com/markets/2016/08/08/tyson-

helped-by-prepared-foods-beats-and-raises-outlook.html

37 Thornton, G. (2016, May 13). The new Tyson Foods is built for growth. Retrieved September 20,

2016, from http://www.wattagnet.com/blogs/6-all-things-poultry/post/26935-the-new-tyson-

foods-is-built-for-growth

38 MCCARTHY, R. (2016, May 10). Tyson Foods, Amazon Fresh close to meal kit launch. Retrieved

September 20, 2016, from

http://www.meatpoultry.com/articles/news_home/Business/2016/05/Tyson_Foods_Amazon_Fre

sh_close.aspx?ID={83BC2C5D-8BB3-4A52-92C8-7C7FA74348C0}

39 Vault. (2016). TYSON FOODS, INC.|Company Profile|Vault.com. Retrieved September 20, 2016,

from http://www.vault.com/company-profiles/food-beverage/tyson-foods,-inc/company-

overview.aspx

40 Stormlake. (2016, September 08). Tyson profits soar to record level, Hillshire expected to

further help gains. Retrieved September 20, 2016, from

http://www.stormlakepilottribune.com/story/2337452.html

41 Singh, S. (2016, February 16). Tyson CEO Plans to Defend Meat-Market Share, Boost Innovation.

Retrieved September 20, 2016, from http://www.bloomberg.com/news/articles/2016-02-

17/tyson-ceo-plans-to-defend-meat-market-share-boost-innovation

42 Sun, L. (2016, May 11). Instant Analysis: Amazon.com Partners With Tyson Foods for Meal Kit

Delivery. Retrieved September 20, 2016, from

http://www.fool.com/investing/general/2016/05/11/instant-analysis-amazoncom-partners-with-

tyson-foo.aspx

16

43 Bunge, J. (2016, August 08). Tyson, Helped by Prepared Foods, Raises Outlook. Retrieved

September 20, 2016, from http://www.wsj.com/articles/tyson-helped-by-prepared-foods-raises-

outlook-1470660096

44 Research & Development. Tyson Foods. September 20, 2016, Retrieved from

http://www.tysonfoods.com/innovation/research-and-development

45 Singh, S. (2016, March 8). Buying Chicken With a Smartphone: Tyson Goes High-Tech in China.

Retrieved September 20, 2016, from http://www.bloomberg.com/news/articles/2016-03-

08/buying-chicken-with-a-smartphone-tyson-goes-high-tech-in-china

46 Dividend (2016). Dividend by Sectors. Retrieved from http://www.dividend.com/how-to-

invest/comparing-dividend-stock-sectors-by-yield/

Tyson FoodsWeighted Average Cost of Capital (WACC) Estimation

WACC = 5.27%EquityRisk Free Rate 2.93%Beta 0.66Equity Risk Premium 5%Stock Price 56.12$ Shares Outstanding (in Millions) 369Total Value of Equity (in Millions) 20,708$ Weight of Equity 74.33%Cost of Equity (Re) 6.23%

DebtOperating Leases 428$ Current Portion of Long Term Debt 715$ Long Term Debt 6,010$ Total Value of Debt 7,153$ Weight of Debt 25.67%Pre Tax Cost of Debt (Rd) 4.31%Marginal Tax Rate 41.90%

Value 27,862$

WACC = Re(E/V)+Rd(D/V)+Rpfd(PFD/V)

Tyson FoodsKey Assumptions of Valuation Model

Ticker Symbol TSN

Current Share Price $56.12

Current Model Date 12/2/2016Fiscal Year End Sep. 30

Pre-Tax Cost of Debt 4.31% Beta

Beta 0.66 Daily Weekly MonthlyRisk-Free Rate 2.93% 1 0.397 0.392 0.086Market rate of return 7.93% 3 0.696 0.656 0.386

Equity Risk Premium 5.00% 5 0.72 0.665 0.126

CV Growth of NOPLAT 2.10%

CV Growth of EPS 2.21%

CV Growth of ROIC 9.76%

Current Dividend Yield 0.87%Marginal Tax Rate 41.90%WACC 5.27%

Tyson FoodsSensitive Analysis

62.63$ 4.01% 4.11% 4.21% 4.31% 4.41% 4.51% 4.61%

32.90% 77.91 77.39 76.87 76.35 75.84 75.34 74.8435.90% 73.31 72.82 72.35 71.87 71.41 70.94 70.4838.90% 68.61 68.17 67.73 67.30 66.87 66.45 66.0341.90% 63.83 63.42 63.03 62.63 62.24 61.86 61.48

44.90% 58.94 58.58 58.22 57.87 57.51 57.17 56.8247.90% 53.96 53.64 53.32 53.00 52.68 52.37 52.0650.90% 48.88 48.59 48.31 48.03 47.75 47.47 47.19

62.63$ 0.60 0.62 0.64 0.66 0.68 0.70 0.72

4.40% 78.91 76.40 74.01 71.73 69.55 67.47 65.474.60% 75.52 73.07 70.73 68.50 66.37 64.33 62.384.80% 72.34 69.94 67.65 65.47 63.39 61.40 59.505.00% 69.36 67.01 64.77 62.63 60.60 58.65 56.795.20% 66.55 64.25 62.05 59.96 57.97 56.07 54.255.40% 63.90 61.64 59.50 57.45 55.50 53.64 51.865.60% 61.40 59.19 57.08 55.08 53.17 51.35 49.61

62.63$ 87.40% 87.60% 87.80% 88.00% 88.20% 88.40% 88.60%

1.50% 65.83 62.31 58.78 55.26 51.74 48.21 44.691.70% 68.53 64.84 61.14 57.44 53.75 50.05 46.351.90% 71.55 67.66 63.77 59.88 56.00 52.11 48.222.10% 74.95 70.84 66.74 62.63 58.53 54.42 50.322.30% 78.81 74.45 70.10 65.75 61.40 57.05 52.702.50% 83.22 78.59 73.95 69.32 64.69 60.06 55.422.70% 88.32 83.36 78.40 73.45 68.49 63.53 58.57

62.63$ 6.76% 7.76% 8.76% 9.76% 10.76% 11.76% 12.76%

4.97% 61.20 65.71 69.19 71.95 74.21 76.08 77.655.07% 58.28 62.62 65.97 68.64 70.81 72.61 74.125.17% 55.55 59.74 62.97 65.54 67.63 69.36 70.825.27% 53.00 57.04 60.15 62.63 64.65 66.32 67.735.37% 50.60 54.50 57.51 59.90 61.85 63.47 64.835.47% 48.35 52.12 55.02 57.34 59.22 60.78 62.105.57% 46.22 49.87 52.68 54.92 56.74 58.25 59.53

WACC

CV ROIC

COGS/Sales

Beta

Pre-Tax Cost of Debt

Tax Rate

Equity

Risk

Premium

CV Growth

Tyson FoodsRevenue DecompositionIn Millions of USD except Per Share

Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV

Revenue ($) 34,384 37,505 41,435 38,473 39,664 41,065 42,571 44,042 Beef 14,400 16,177 17,236 14,995 15,295 15,754 16,227 16,795 Chicken 10,988 11,116 11,390 11,048 11,269 11,607 11,956 12,314 Pork 5,408 6,304 5,262 4,999 5,149 5,355 5,623 5,904 Prepared Foods 3,322 3,927 7,822 7,431 7,951 8,349 8,766 9,029

Percent Change (YoY)

Revenue 3.29% 9.08% 10.48% -7.15% 3.10% 3.53% 3.67% 3.45% Beef 4.69% 12.34% 6.55% -13.00% 2.00% 3.00% 3.00% 3.50% Chicken -3.34% 1.16% 2.46% -3.00% 2.00% 3.00% 3.00% 3.00% Pork -1.85% 16.57% -16.53% -5.00% 3.00% 4.00% 5.00% 5.00% Prepared Foods 2.63% 18.21% 99.19% -5.00% 7.00% 5.00% 5.00% 3.00%

Sales Change (YoY)

Sales Change - Volume % -0.20% 2.40% 5.00% 1.40% 2.50% 3.20% 2.80% 3.00% Sales Change - Prices % 4.60% 6.90% 4.80% -8.43% 0.58% 0.32% 0.84% 0.44%

Tyson FoodsCash Flow StatementIn Millions of USD except Per Share

Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV

Cash Flow

Operating Activities

Net Income / Starting Line 918 872 1,216 1,198 1,213 1,232 1,223 1,228 Depreciation, Depletion & Amortization 519 530 711 675 717 779 860 964 Deferred Taxes & Investment Tax Credit (12) (105) 38 24 24 24 24 24 Noncontrolling interest 9 (1) (1) (2) 1 Changes in Working Capital

(Increase) decrease in Receivables (126) (93) 66 (46) (40) (47) (45) (67) (Increase) decrease in Inventories 15 (148) 220 121 (50) (48) 1 (63) (Increase) decrease in Accounts Payable (12) 202 (162) 201 63 66 45 373 (Increase) decrease in interest payable - 5 (23) (42) 15 25 26 38 (Increase) decrease in Other Assets/Liabilities (28) (115) 71 (8) 6 8 17 287

Net Operating Cash Flow 1,314 1,178 2,570 2,131 1,947 2,038 2,148 2,785

Investing Activities

Capital Expenditures (558) (632) (854) (966) (1,183) (1,397) (1,677) (1,998) Other, net 39 10 31 (9) (9) (9) (10) (10) Net Investing Cash Flow (643) (8,800) (270) (975) (1,192) (1,406) (1,686) (2,007)

Financing Activities

Proceeds from issuance of short-term debt 64 68 66 67 67 Proceeds from issuance of long-term debt 68 5,576 501 (312) 182 755 594 846 Other long-term liability (48) 33 38 41 40 Issuance of common stock 59 59 59 59 59 Repurchases of common stock (614) (295) (495) (408) (449) (494) (543) (597) Dividends (104) (104) (147) (218) (233) (247) (260) (272) Other, net 18 (23) 17 (7) (4) (8) (0) 8 Net Financing Cash Flow (632) 5,154 (124) (871) (344) 170 (42) 149

Net Change in Cash 74 -707 250 285 411 802 420 927 Beginning Cash Balance 1071 1145 438 688 973 1,384 2,186 2,606

Ending Cash Balance 1145 438 688 973 1,384 2,186 2,606 3,533

Tyson FoodsBalance SheetIn Millions of USD except Per Share

Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV

AssetCash, Cash Equivalents & STI 1,145 438 688 973 1,384 2,186 2,606 3,533 Accounts & Notes Receiv 1,497 1,684 1,620 1,666 1,706 1,753 1,797 1,864 Inventories 2,817 3,274 2,878 2,757 2,808 2,856 2,854 2,917 Other ST Assets 145 825 195 214 219 239 224 212 Total Current Assets 5,604 6,221 5,381 5,610 6,117 7,034 7,482 8,527

Property, Plant & Equip, Net 4,053 5,130 5,176 5,527 6,054 6,732 7,610 8,704 Property, Plant & Equip 9,202 10,381 10,816 11,782 12,965 14,362 16,038 18,036 Accumulated Depreciation 5,149 5,251 5,640 6,254 6,911 7,629 8,429 9,332

Goodwill 1,902 6,706 6,667 6,667 6,667 6,667 6,667 6,667 Intangible Assets 138 5,276 5,168 5,108 5,047 4,987 4,926 4,866 Other LT Assets 480 623 612 621 630 639 649 659 Total Noncurrent Assets 6,573 17,735 17,623 17,923 18,398 19,025 19,852 20,896 Total Assets 12,177 23,956 23,004 23,533 24,515 26,059 27,334 29,423

Liabilities

Accounts Payable 1,359 1,806 1,662 1,863 1,927 1,992 2,037 2,410 ST Debt & Current Portion of LT Debt 513 643 715 779 847 913 980 1,047 Accrued Payroll 419 490 478 436 451 476 502 540 Miscellaneous Current Liabilities 719 858 680 690 702 730 732 1,007 Total Current Liabilities 3,010 3,797 3,535 3,769 3,927 4,111 4,250 5,003

LT Debt 1,895 7,535 6,010 5,698 5,880 6,635 7,229 8,075 Other LT Liabilities 560 1,270 1,304 1,256 1,289 1,327 1,369 1,409 Deferred Tax Liabilities 479 2,450 2,449 2,473 2,497 2,521 2,545 2,570 Total Noncurrent Liabilities 2,934 11,255 9,763 9,427 9,665 10,483 11,143 12,054 Total Liabilities 5,944 15,052 13,298 13,195 13,592 14,594 15,394 17,057

Shareholders' Equity

Common Stock 2,331 4,299 4,349 4,408 4,466 4,525 4,584 4,643 Treasury Stock (1,021) (1,010) (1,381) (1,789) (2,238) (2,732) (3,275) (3,872) Retained Earnings 4,999 5,748 6,813 7,793 8,773 9,758 10,721 11,676 Other Equity (108) (147) (90) (97) (101) (109) (109) (101) Total Shareholder's Equity 6,201 8,890 9,691 10,314 10,900 11,443 11,921 12,345 Accumulated Minority Interest 32 14 15 24 23 22 19 21 Total Equity 6,233 8,904 9,706 10,338 10,923 11,464 11,940 12,366 Total Liabilities & Equity 12,177 23,956 23,004 23,533 24,515 26,059 27,334 29,423

Tyson FoodsIncome StatementIn Millions of USD except Per Share

Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV

Revenue 34,384 37,505 41,435 38,473 39,664 41,065 42,571 44,042

COGS 31,468 34,131 36,648 33,857 34,905 36,137 37,462 38,757

Depreciation 474 494 609 614 656 719 799 903

Amortization of Intangibles 45 36 102 60 60 60 60 60

Gross Income 2,397 2,844 4,076 3,942 4,043 4,149 4,249 4,321

SG&A Expense 933 1,203 1,738 1,616 1,654 1,698 1,745 1,792

Research & Development 50 52 75 70 80 91 103 115

EBIT (Operating Income) 1,414 1,589 2,338 2,256 2,310 2,360 2,401 2,414

Nonoperating Income - Net 20 10 203 93 66 52 - -

Interest Expense 145 132 293 287 288 292 297 301

Unusual Expense - Net 32 215 327 - - - - -

Pretax Income 1,257 1,252 1,921 2,062 2,088 2,120 2,104 2,113

Income Taxes 409 396 697 864 875 888 882 885

Consolidated Net Income 848 856 1,224 1,198 1,213 1,232 1,223 1,228

Minority Interest - (8) 4 - - - - -

Net Income 848 864 1,220 1,198 1,213 1,232 1,223 1,228

Total Shares Outstanding 344 376 369 364 358 353 347 340

Basic Weighted Avg Shares 352 360 373 366 361 355 350 343

Basic EPS 2.21 2.48 3.01 3.27 3.36 3.47 3.50 3.57

Dividends per Share 0.23 0.33 0.45 0.60 0.65 0.70 0.75 0.80

Tyson FoodsCommon Size Income Statement(Total Sales Basis)Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV

Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%COGS 91.52% 91.00% 88.45% 88.00% 88.00% 88.00% 88.00% 88.00%Depreciation 1.38% 1.32% 1.47% 1.60% 1.65% 1.75% 1.88% 2.05%Amortization of Intangibles 0.13% 0.10% 0.25% 0.16% 0.15% 0.15% 0.14% 0.14%

Gross Income 6.97% 7.58% 9.84% 10.25% 10.19% 10.10% 9.98% 9.81%Selling, General & Admin 2.71% 3.21% 4.19% 4.20% 4.17% 4.13% 4.10% 4.07%Research & Development 0.15% 0.14% 0.18% 0.18% 0.20% 0.22% 0.24% 0.26%

EBIT (Operating Income) 4.11% 4.24% 5.64% 5.86% 5.82% 5.75% 5.64% 5.48%Nonoperating Income - Net 0.06% 0.03% 0.49% 0.24% 0.17% 0.13% 0.00% 0.00%Interest Expense - Net 0.42% 0.35% 0.71% 0.75% 0.73% 0.71% 0.70% 0.68%Other Non-Op (Income) Loss 0.09% 0.57% 0.79% 0.00% 0.00% 0.00% 0.00% 0.00%

Pretax Income 3.66% 3.34% 4.64% 5.36% 5.26% 5.16% 4.94% 4.80%Income Taxes 1.19% 1.06% 1.68% 2.25% 2.21% 2.16% 2.07% 2.01%Consolidated Net Income 2.47% 2.28% 2.95% 3.11% 3.06% 3.00% 2.87% 2.79%Minority Interest 0.00% -0.02% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00%Net Income 2.47% 2.30% 2.94% 3.11% 3.06% 3.00% 2.87% 2.79%

Tyson FoodsCommon Size Balance Sheet(Total Sales Basis)Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV

AssetCash, Cash Equivalents & STI 3.33% 1.17% 1.66% 2.53% 3.49% 5.32% 6.12% 8.02%Accounts Receivables, Net 4.35% 4.49% 3.91% 4.33% 4.30% 4.27% 4.22% 4.23%Inventories 8.19% 8.73% 6.95% 7.17% 7.08% 6.95% 6.70% 6.62%Other Current Assests 0.42% 2.20% 0.47% 0.56% 0.55% 0.58% 0.53% 0.48%

Total Current Assets 16.30% 16.59% 12.99% 14.58% 15.42% 17.13% 17.58% 19.36%Property, Plant & Equip, Net 11.79% 13.68% 12.49% 14.37% 15.26% 16.39% 17.88% 19.76%Property, Plant & Equip 26.76% 27.68% 26.10% 30.62% 32.69% 34.97% 37.67% 40.95%Accumulated Depreciation 14.97% 14.00% 13.61% 16.26% 17.42% 18.58% 19.80% 21.19%Other LT Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total Noncurrent Assets 19.12% 47.29% 42.53% 46.59% 46.38% 46.33% 46.63% 47.45%Total Assets 35.41% 63.87% 55.52% 61.17% 61.81% 63.46% 64.21% 66.81%Liabilities

Payables & Accruals 3.95% 4.82% 4.01% 4.84% 4.86% 4.85% 4.79% 5.47%ST Debt 1.49% 1.71% 1.73% 2.02% 2.14% 2.22% 2.30% 2.38%Accrued Payroll 1.22% 1.31% 1.15% 1.13% 1.14% 1.16% 1.18% 1.23%Miscellaneous Current Liabilities 2.28% 2.51% 1.86% 2.04% 2.01% 2.02% 1.95% 2.60%

Total Current Liabilities 8.75% 10.12% 8.53% 9.80% 9.90% 10.01% 9.98% 11.36%LT Debt 5.51% 20.09% 14.50% 14.81% 14.82% 16.16% 16.98% 18.34%Pension Liabilities 0.46% 1.42% 0.23% 0.00% 0.00% 0.00% 0.00% 0.00%Deferred Tax Liabilities 1.39% 6.53% 5.91% 6.43% 6.29% 6.14% 5.98% 5.83%Misc LT Liabilities 1.17% 1.97% 2.92% 3.15% 0.00% 0.00% 0.00% 0.00%

Total Noncurrent Liabilities 8.53% 30.01% 23.56% 24.50% 24.37% 25.53% 26.18% 27.37%Total Liabilities 17.29% 40.13% 32.09% 34.30% 34.27% 35.54% 36.16% 38.73%Equity

Common Stock 6.78% 11.46% 10.50% 11.46% 11.26% 11.02% 10.77% 10.54%Treasury Stock -2.97% -2.69% -3.33% -4.65% -5.64% -6.65% -7.69% -8.79%Retained Earnings 14.54% 15.33% 16.44% 20.25% 22.12% 23.76% 25.18% 26.51%Other Equity -0.31% -0.39% -0.22% -0.25% -0.25% -0.26% -0.26% -0.23%

Total Shareholder's Equity 18.03% 23.70% 23.39% 26.81% 27.48% 27.87% 28.00% 28.03%Accumulated Minority Interest 0.09% 0.04% 0.04% 0.06% 0.06% 0.05% 0.05% 0.05%

Total Equity 18.13% 23.74% 23.42% 26.87% 27.54% 27.92% 28.05% 28.08%Total Liabilities & Equity 35.41% 63.87% 55.52% 61.17% 61.81% 63.46% 64.21% 66.81%

Tyson FoodsValue Driver EstimationIn Millions of USD except Per Share

Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV

Operating Revenues 34,384 37,505 41,435 38,473 39,664 41,065 42,571 44,042 COGS 31,468 34,131 36,648 33,857 34,905 36,137 37,462 38,757 SG + A 933 1,203 1,738 1,616 1,654 1,698 1,745 1,792 Depreciation 474 494 609 614 656 719 799 903 Amortization of Intangible 45 36 102 60 60 60 60 60 RD 50 52 75 70 80 91 103 115 Implied Interest on Leases 12 12 15 18 18 20 22 25 EBITA 1,426 1,601 2,278 2,275 2,328 2,380 2,423 2,439

Income Tax Expense 409 396 697 864 875 888 882 885 + Tax Sheild on Int Expense 61 55 123 120 121 122 124 126 + Tax Shield on Implied Lease Interest 5 5 6 8 7 8 9 10 + Tax Shield on Unusual Expense 13 90 137 - - - - - - Tax on Non-Operating Income 8 4 85 39 28 22 - - Total adjusted taxes 480 542 878 953 975 997 1,015 1,022

Deferred Taxes (79) 1,971 (1) 24 24 24 24 24

NOPLAT 867 3,030 1,399 1,345 1,376 1,407 1,432 1,441

Normal cash 172 188 207 973 198 205 213 220 Accounts Receivable, Net 1,497 1,684 1,620 1,666 1,706 1,753 1,797 1,864 Inventories 2,817 3,274 2,878 2,757 2,808 2,856 2,854 2,917 Operating Current Assets 4,486 5,146 4,705 5,397 4,712 4,814 4,865 5,002 Accounts payable 1,359 1,806 1,662 1,863 1,927 1,992 2,037 2,410 Accrued Payroll 419 490 478 436 451 476 502 540 Non Interest-Bearing Current Liabilities 1,778 2,296 2,140 2,300 2,378 2,468 2,539 2,950 Gross PPE 9,202 10,381 10,816 11,782 12,965 14,362 16,038 18,036 Accumulated Depreciation 5,149 5,251 5,640 6,254 6,911 7,629 8,429 9,332 Net Property, Plant, and Equipment 4,053 5,130 5,176 5,527 6,054 6,732 7,610 8,704 Net Intangible Assets (non-goodwill) 138 5,276 5,168 5,108 5,047 4,987 4,926 4,866 Capitalized PV of Operating Leases 289 359 428 467 514 569 635 714 Net Other Operating Assets 427 5,635 5,596 5,574 5,561 5,556 5,562 5,580 Deferred revenue (long-term) 719 858 680 690 702 730 732 1,007 Other Operating Liabilities 719 858 680 690 702 730 732 1,007

Invested Capital 6,469 12,757 12,658 13,509 13,247 13,904 14,766 15,330

NOPLAT 867 3,030 1,399 1,345 1,376 1,407 1,432 1,441 Beg. Invested Capital 6,330 6,469 12,757 12,658 13,509 13,247 13,904 14,766 ROIC 13.70% 46.84% 10.97% 10.63% 10.19% 10.62% 10.30% 9.76%

NOPLAT 867 3,030 1,399 1,345 1,376 1,407 1,432 1,441 Change in Invested Capital 138 6,288 (99) 851 (261) 656 862 564 FCF 729 (3,258) 1,499 494 1,638 751 570 877

Beg. Invested Capital 6,330 6,469 12,757 12,658 13,509 13,247 13,904 14,766 ROIC-WACC 8.43% 41.57% 5.70% 5.36% 4.92% 5.35% 5.02% 4.49%EP 534 2,689 727 678 664 708 699 663

Tyson FoodsDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 2.10% CV ROIC 9.76% WACC 5.27% Cost of Equity 6.23%NOPLAT CV 1,441

DCF Model EP ModelFiscal Years Ending Sep. 30 2016E 2017E 2018E 2019E 2020CV Fiscal Years Ending Sep. 30 2016E 2017E 2018E 2019E 2020CV

Free Cash Flow 494.30 1,637.70 750.53 570.03 877.05 NOPLAT 1345 1376 1407 1432 1441Free Cash Flow Continuing Value 35,648.22 BEG IC 12658 13509 13247 13904 14766

Periods to Discount 1 2 3 4 4 EP 678 664 708 699 663Discount Factor 1.05 1.11 1.17 1.23 1.23 CV 20883

469.54 1477.74 643.30 464.11 29024.41 Periods to Discount 1 2 3 4 4Value of Operating assets 32,079.10 Discount Factor 1.05 1.11 1.17 1.23 1.23

V(Non-operating ) PV of EP 643.95 599.20 607.17 568.76 17002.45 Minority interest 15.00 VALUE OF OPERATING ASSET 32079.10

Other assets 612.00 V(Non-operating ) Other current asset 195.00 Minority interest 15.00

Other assets 612.00 V(debt) Other current asset 195.00

Short Term Debt 715.00 Long-Term Debt 6,010.00 V(debt)

Short Term Debt 715.00 V(other) Long-Term Debt 6,010.00

PV of Operating Leases 428.39 Other Current Liabilities 680.00 V(other)Other Liabilities 1,304.00 PV of Operating Leases 428.39 ESOP 460.73 Other Current Liabilities 680.00 Minority interest Liability 15.00 Other Liabilities 1,304.00 Underfunded post returement liabilities 114.00 ESOP 460.73 Underfunded pension liabilities 209.00 Minority interest Liability 15.00

Underfunded post returement liabilities 114.00 Value of Equity 22,964.97 Underfunded pension liabilities 209.00 Share outstanding 369 Share price (9-30-15) 62.24$ Value of Equity 22,964.97 Adjusted Price (11-13-16) 62.63$ Share outstanding 369

Share price (9-30-15) 62.24$ Adjusted Price (11-13-16) 62.63$

Tyson FoodsDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Sep. 30 2016E 2017E 2018E 2019E 2020CV

EPS 3.27$ 3.36$ 3.47$ 3.50$ 3.57$

Key Assumptions CV growth 2.10% CV ROE 9.94% Cost of Equity 6.23%

Future Cash Flows P/E Multiple (CV Year) 19.10 EPS (CV Year) 3.57$ Future Stock Price 68.27$ Dividends Per Share Future Cash Flows

Divdends Per Share 0.60 0.65 0.70 0.75CV 68.27Discount period 1 2 3 4 4Discount factor 1.06 1.13 1.20 1.27 1.27Discounted cash flow 0.56$ 0.58$ 0.58$ 0.59$ 53.61$

Intrinsic Value (9-30-15) 55.92$ Adjusted Price (11-13-16) 56.28$

Tyson FoodsRelative Valuation Models

EPS EPSTicker Company Price 2016E 2017E P/E 16 P/E 17

CAG ConAgra Foods, Inc. $34.93 $1.63 $1.67 21.4 20.9 15.29

CPB Campbell Soup Company $53.50 $2.94 $3.05 18.2 17.5 16.45

GIS General Mills, Inc. $61.04 $2.92 $3.09 20.9 19.8 36.1

HRL Hormel $38.03 $1.63 $1.67 23.3 22.8 18.41

HSY The Hershey Company $97.25 $4.31 $4.64 22.6 21.0 20.73

K Kellogg Company $72.50 $3.68 $3.99 19.7 18.2 25.39

KHC Kraft Heinz Company $81.21 $3.28 $3.92 24.8 20.7 98.89

MKC McCormick Non Vtg $91.52 $3.78 $4.12 24.2 22.2 11.54SAFM Sanderson Farms $86.59 $7.37 $8.33 11.7 10.4 1.89

Average 21.5 20.3

TSN Tyson Foods $56.12 3.27 3.36 17.2 16.7 24.25

Implied Value:

Relative P/E (EPS16) $ 70.22

Relative P/E (EPS17) 68.32$

Market Cap

(Billion)

Tyson FoodsKey Management RatiosFiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV

Liquidity RatiosWorking Capital Current Assets - Current Liabilities 2,573 2,594 2,424 1,846 1,842 2,191 2,923 3,232

Current Ratio Current Assets/Current Liabilities 1.91 1.86 1.64 1.52 1.49 1.56 1.71 1.76

Cash Ratio (Cash & Cash Equivalents)/Current Liabilities 0.38 0.12 0.19 0.26 0.35 0.53 0.61 0.71

Activity or Asset-Management RatiosTotal Asset Turnover Sales/Total Assets 2.82 1.57 1.80 1.63 1.62 1.58 1.56 1.50

Inventory Turnover COGS/Average Inventory 11.19 11.21 11.91 12.02 12.54 12.76 13.12 13.43

Inventory Period 365/Inventory Turnover 32.63 32.57 30.64 30.38 29.10 28.60 27.82 27.18

Financial Leverage RatiosDebt Ratio Total Debt/Total Assets 19.77% 34.14% 29.23% 27.52% 27.44% 28.96% 30.03% 31.00%

Debt to Equity Total Debt/Total Equity 38.63% 91.85% 69.29% 62.65% 61.58% 65.84% 68.75% 73.76%

Interest Coverage EBIT/Interest Charges 9.75 12.04 7.98 7.86 8.03 8.08 8.10 8.01

Profitability RatiosNet Profit on Sales (Sales - COGS)/Sales 2.47% 2.30% 2.94% 3.11% 3.06% 3.00% 2.87% 2.79%

Gross Profit Margin Gross Profit/Sales 6.97% 7.58% 9.84% 10.25% 10.19% 10.10% 9.98% 9.81%

ROA Net Income/Total Assets 8.25% 5.51% 6.44% 6.38% 6.25% 6.03% 5.69% 5.39%

ROE Net Income/Shareholder Equity 7.05% 4.78% 5.20% 5.15% 5.05% 4.87% 4.58% 4.33%

Payout Policy RatiosDividend Payout Dividends per Share/Earnings per Share 10.18% 13.10% 14.94% 18.35% 19.34% 20.20% 21.45% 22.38%

Total Payout Ratio (Dividends + Repurchases)/Net Income 0.62 0.13 0.44 0.52 0.56 0.60 0.66 0.71

Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating OperatingFiscal Years Ending Sep. 30 Leases Fiscal Years Ending Sep. 30 Leases Fiscal Years Ending Leases Fiscal Years Ending 77.3850368598279 Leases

2016 125 2015 107 2014 97 2013 1012017 98 2016 80 2015 69 2014 722018 72 2017 56 2016 46 2015 472019 48 2018 39 2017 27 2016 322020 39 2019 30 2018 16 2017 21Thereafter 111 Thereafter 104 Thereafter 78 Thereafter 55Total Minimum Payments 493 Total Minimum Payments 416 Total Minimum Payments 333 Total Minimum Payments 328Less: Interest 65 Less: Interest 57 Less: Interest 44 Less: Interest 38PV of Minimum Payments 428 PV of Minimum Payments 359 PV of Minimum Payments 289 PV of Minimum Payments 290

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.31% Pre-Tax Cost of Debt 4.31% Pre-Tax Cost of Debt 4.31% Pre-Tax Cost of Debt 4.31%Number Years Implied by Year 6 Payment 2.8 Number Years Implied by Year 6 Payment 3.5 Number Years Implied by Year 6 Payment 4.9 Number Years Implied by Year 6 Payment 2.6

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 125 119.8 1 107 102.6 1 97 93.0 1 101 96.82 98 90.1 2 80 73.5 2 69 63.4 2 72 66.23 72 63.4 3 56 49.3 3 46 40.5 3 47 41.44 48 40.5 4 39 32.9 4 27 22.8 4 32 27.05 39 31.6 5 30 24.3 5 16 13.0 5 21 17.06 & beyond 39 82.9 6 & beyond 30 76.7 6 & beyond 16 55.9 6 & beyond 21 41.3PV of Minimum Payments 428.4 PV of Minimum Payments 359.4 PV of Minimum Payments 288.6 PV of Minimum Payments 289.7

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 14,735,065Average Time to Maturity (years): 7.10Expected Annual Number of Options Exercised: 2,075,361

Current Average Strike Price: 28.30$ Cost of Equity: 6.23%Current Stock Price: $56.12

2016E 2017E 2018E 2019E 2020CV

Increase in Shares Outstanding: 2,075,361 2,075,361 2,075,361 2,075,361 2,075,361Average Strike Price: 28.30$ 28.30$ 28.30$ 28.30$ 28.30$ Increase in Common Stock Account: 58,732,724 58,732,724 58,732,724 58,732,724 58,732,724

Change in Treasury Stock -408,100,000 -448,910,000 -493,801,000 -543,181,100 -597,499,210Expected Price of Repurchased Shares: 56.12$ 59.62$ 63.33$ 67.28$ 71.47$ Number of Shares Repurchased: (7,271,917) (7,529,991) (7,797,223) (8,073,939) (8,360,475)

Shares Outstanding (beginning of the year) 369,000,000 363,803,444 358,348,815 352,626,953 346,628,376Plus: Shares Issued Through ESOP 2,075,361 2,075,361 2,075,361 2,075,361 2,075,361Less: Shares Repurchased in Treasury (7,271,917) (7,529,991) (7,797,223) (8,073,939) (8,360,475) Shares Outstanding (end of the year) 363,803,444 358,348,815 352,626,953 346,628,376 340,343,262

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol TSNCurrent Stock Price $56.12Risk Free Rate 2.93%Current Dividend Yield 0.87%Annualized St. Dev. of Stock Returns 27.10%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price Granted

Range 1 14,735,065 28.30 7.10 31.27$ 460,731,167$

Total 14,735,065 28.30$ 7.10 34.41$ 460,731,167$