Outlook Intact for No-Moat Tyson

In the wake of third-quarter results that were consistent with its fiscal 2018 guidance reduction on July 30, we do not expect to materially alter our $67 fair value estimate for no-moat

Year to date, Tyson reported 7% sales growth and an adjusted operating margin of 8%, near our 6% and 8% full-year marks. The firm maintained its fiscal 2018 sales expectation of $40 billion to $41 billion and announced that it expects $42 billion in fiscal 2019, above our $41 billion target. Additionally, management reiterated its updated EPS outlook of $5.70-$6, reduced last week from $6.55 to $6.70 (we expect $5.84).

We continue to expect near-term challenges to be concentrated in Tyson's chicken and pork segments. Management cited lower competing protein prices as a headwind for chicken as cattle herd sizes normalize (leading to attractively priced ground beef) and trade feuds weigh on pork. Longer term, however, we expect chicken will take share from other protein sources due to its attractive cost and health profile, underpinning our long-term segment growth expectation of just under 4% for a unit that accounted for around 30% of fiscal 2017 sales.

Tyson's beef unit (just under 40% of fiscal 2017 sales) continued its strong run, with 5% year-to-date growth against a 6% adjusted operating margin compared with 5% in the same period of fiscal 2017. Management expects the unit to remain strong, forecasting a fiscal 2018 profitability mark above 6% and a similar level in fiscal 2019. While our near-term margin targets are similar, just below 6% in fiscal 2018 and 2019, we believe the unit's results will normalize in the low single digits as consumers continue their shift to healthier, lower-cost poultry.

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