Tyson Foods: A Long-Term Catalyst For The Food Behemoth (NYSE:TSN)

Tyson Foods (NYSE:TSN) is undoubtedly a household name, especially when it comes to the U.S. market. This is because the firm operates as one of the largest food producers on the planet, with significant brands under its belt such as Tyson, Jimmy Dean, Hillshire Farm, Ball Park, and more. The company really likes to sell itself as an enterprise that specializes in the production of chicken. But it also produces pork, beef, and a variety of prepared foods. This is not the kind of business their investors would generally consider to be on the cutting edge of things. But the firm does have a bit of history dabbling in some interesting ventures. In particular, the firm seems to be paying attention to some extent to alternative proteins such as plant-based offerings and, more importantly, cultivated meat.

In the near term, I do not expect these endeavors to move the needle for the business or its investors. But I do expect the company to shift meaningfully in that direction over the next few years. This will not be a cheap path for the company to take. But when you consider the benefits of doing so, not only from a corporate perspective, but also from a social and environmental perspective, it is the obvious choice. Investors would be wise to scrutinize each step that the company takes in this direction. But the more the firm focuses on alternative proteins, the more investors should be bullish about the company in general.

Tyson Foods has a problem

Since its founding in 1935, Tyson Foods has grown into a behemoth in the global food market. The company has operations spread across not only the US, but also across Australia, China, Malaysia, Mexico, the Netherlands, South Korea, and Thailand. Management likes to describe the company as an enterprise that’s focused on its chicken operations. But investors who are impartial would not exactly agree with that categorization. Using data from the company’s 2022 fiscal year, for instance, we see that 35.9% of its revenue came from sales of beef products. By comparison, chicken sales accounted for only 30.7% of sales. Beef was also far more profitable for the company in 2022, with segment operating margins totaling 12.6% compared to the 5.6% seen for chicken. Even prepared foods were more profitable relative to revenue, with an operating margin totaling 7.7%.

This is not to say that the company is not focused on growing its chicken exposure. Over the past three fiscal years, revenue associated with chicken has grown by 28.2% compared to the 26.1% growth seen when it comes to beef. Much of this growth when it comes to both products can be chalked up to price increases. But there is a very important reason why management wants to move more in the direction of chicken. Looking at data for the U.S. market dating from 1960 through today, we find some interesting changes when it comes to consumer behavior. As the chart below illustrates, pork consumption per capita has been virtually flat during this time, while beef consumption per capita has actually declined. Poultry, on the other hand, has shot through the roof. Americans have gone from consuming 34.2 pounds of poultry per year in 1960 to 115.2 pounds per year in 2022. This year, that number is expected to grow to 116.8 pounds, while for 2024 it should grow further to 118.5 pounds. A combination of cost and health factors are largely responsible for this shift in consumer sentiment.

It’s great that management recognizes and opportunity. However, there are certain challenges that lie ahead. For instance, globally, livestock raised for food accounts for roughly 14.5% of all global greenhouse gas emissions. In countries like China, that number is even worse. China’s livestock was responsible for about 29% of the countries direct and indirect agriculture emissions back in 2014. By 2050, it’s estimated that the global demand for meat as a whole is expected to approximately double, resulting in global emissions from food production as a whole shooting up about 60%. Not only is a continually growing population fueling this. There’s also the fact that, in countries like China and India, there is substantial middle class expansion.

While this brings with it certain opportunities, it also brings with it certain challenges. You have changes in consumer sentiment when it comes to particular types of meat. You also have the challenges that come with growing demand and addressing climate change. Another issue that I feel does not get enough attention is the cruelty involved in slaughtering animals for food purposes. I am the furthest thing from a vegetarian, but even I recognize that meat consumption it’s not exactly a humane endeavor. A combination of these factors are likely why, a few years ago, the management team at Tyson Foods began making some interesting investments.

In 2016, for instance, the company, through a subsidiary called Tyson Ventures, invested in Beyond Meat (BYND). They ended up acquiring 5% of the enterprise for an undisclosed sum in 2016. They ended up increasing their stake to 6.5% before ultimately selling out in 2019. The decision to sell their ownership in the company was not exactly because of fundamental concerns. Instead, reports indicated that tensions started developing between the two companies, largely centered around reports that Tyson Foods was planning to launch its own alternative protein products.

Even though that investment was short lived, another investment made by Tyson Foods that has lasted longer was in a startup called Memphis Meats. That company has since changed its name to Upside Foods. Unlike Beyond Meat, which focuses largely on plant-based alternatives to meat, Upside Foods is focused on what is referred to as cultivated meat. This is essentially meat that’s grown in a laboratory from cultured animal cells. That company traces its roots back to its founding in 2015. Since then, it has seen remarkable expansion. In California. And in 2022, it landed an investment of $400 million, bringing total investments in the enterprise up to $608 million. No known valuation has been made public. But reports have said that the company is valued in excess of $1 billion. Naturally, this all means that Tyson Foods isn’t the only company investing in this market. But it is one of the most active.

At this time, there are a number of other early-stage companies focused on cultivated meat production. But when it comes to the US market, Upside Foods appears to be leading the way. Earlier this year, the company received regulatory approval from the FDA, with the clearance signifying the cell-cultivated chicken as being safe for human consumption. This is the first time that the FDA has given that designation to lab grown meat products. For now, Upside Foods’ meat will only be made available in certain high-end restaurants. A big part of the reason for this is that the cost of production is still significantly higher than traditional meat. However, in an interview, the CEO of the startup stated that they are targeting price parity with traditional meat in as little as five years. Though it was also said that it could take as many as 15 years before this occurs.

This could prove to be a really great opportunity for Tyson Foods. According to one source, the market potential by 2040 could be worth as much as $1.1 trillion if we lump all alternative proteins together into one group. That does assume significant consumer adoption, which will be contingent on continued investments aimed at bringing costs down. After all, studies have shown that, while nearly half of all US adults and 60% of those aged 18 to 34 would consider trying cultivated meat, the primary driver behind adoption will be the economic viability of the products in question.

From 2010 through 2022, investors have allocated about $14.2 billion into alternative proteins. Just for plant-based proteins on their own, it’s estimated that, by 2030, $27 billion of additional investments will be needed in order to grow their stake in the global meat market to roughly 6%. In the most recent year, $896 million was invested in alternative proteins. This was down from the $1.3 billion invested in 2021. But given the state of the economy and how things are changing, some volatility is expected. Moving forward, I expect further investments to be made. And the good news is that companies are not likely to shoulder this burden alone. Recently, the Netherlands, for instance, allocated $65 million specifically for cultivated meat and precision fermentation investments. This marks the largest public investment in the cellular agriculture field ever made. Here in the US, Congress allocated $6 million in research funds to alternative protein research and development, while California on its own is allocating $5 million.

Takeaway

At this point in time, Tyson Foods can only be described as a traditional meat producer. However, management has been making investments that are interesting. We are still very much in the early days of alternative proteins. However, this does not change the fact that we will continue to move in the direction of widespread adoption. This is necessitated by both population and environmental concerns. If Tyson Foods continues to invest in this direction, I would view that as a bullish indicator for the company in the long run. The good news is that it already owns a minority stake in the de facto leader of the cultivated meat industry. But in a field that is certain to see rapid changes, dominance today does not necessarily translate to dominance tomorrow. Because of this, investors should continue to monitor the steps that Tyson Foods takes. But absent anything unexpected coming out of the woodwork, I view the developments that have occurred in a favorable light.