Krause Fund Research Fall 2016

Consumer Staples Tyson Foods, Inc. (NYSE: TSN)

Recommendation: HOLD December 2, 2016

Analysts Gyuho Chad Cha [email protected] Current Price: $56.12 Mengjiao Yu [email protected] Target Price: $59.00 – $65.00

Company Overview Enhanced Operating Margin with

Tyson Foods, Inc. (TSN) is an American multination Pending Lawsuit company founded in 1935. Its headquarters is located in Springdale, Arkansas and operates in the food processing  Adjusted EPS in 3Q 2016 was increased by 51% from Q3 industry. The company is the largest meat processor with 2015. Tyson Foods also increased full 2016 ESP guidance from subsidiaries including Jimmy Dean, Hillshire Farm, Sara Lee, $4.40 - $.50 to $4.47 - $4.57 State Fail, Ball Park, and Wright. In 2014, the company acquired Jimmy Dean and Ball Park and sold its poultry  Total sales had been declined compared to the previous 3Q, businesses to its competitor, JBS S.A. for $575 million to but operating income was increased by 36%. focus on the domestic market. As of the end of fiscal year of 2015, it hires more than 113,000 employees and operates 123  Beef segment showed signs of recovery. The beef segment facilities. reported -0.2% operating margin in Q3 2015 and it was increased to positive 2.4% in Q3 2016. Stock Performance Highlights 52 week High $77.05  Although chicken sales had been decreased, its operating 52 week Low $48.52 income was increased due to the enhanced operating margin. Its Beta Value 0.66 operating margin was increased from 11.4% in 3Q 2015 to 13.9% in 3Q 2016. Share Highlights Market Capitalization $25.16 b  Pork Segment recorded the highest increase in operating Shares Outstanding 297.45 m margin in Q3 2016. Its operating margin was 5.3% in Q3 2015 EPS (ttm) $4.11 and increased to 9.6% in Q3 2016. Forward P/E Ratio 13.81 Dividend Yield 0.9% Dividend Payout Ratio 13.3%  Pending lawsuit of chicken price fixing is assumed to have a great impact on Tyson’s stock price. Its operating income for Company Performance Highlights chicken sector has been adjusted. ROA 8.19% ROE 16.82% One Year Stock Performance as of 12/2/2016 Sales (Fiscal Year 2015) $41.37 b Operating Margin (Fiscal Year 2015) 5.2% 80 Operating Margin (3Q 2016) 9.6% 75

Quarterly Earnings per Shares 70 Date EPS % EPS 65 Reported Forecast Surprise 11/23/2015 0.83 0.9 -7.78% 60 2/5/2016 1.15 0.87 32.18% 55 5/9/2016 1.07 0.96 11.46% 50 8/8/2016 1.21 1.07 13.08% 45 Source: Nasdaq Source: Bloomberg 1

EXECUTIVE SUMMARY GDP Growth Rate

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 Source: FRED

Since the great recession, GDP has been on a slow, but positive We believe there are five key economic drivers that affect the growth trajectory, as seen in the graph above. In the third quarter consumer staples sector. They are gross domestic product, of 2016, real GDP rose to an annualized rate of 2.9% from 1.4% unemployment rates, consumer confidence, interest rates, and in the second quarter.3 We expect GDP to increase at a inflation. conservative rate of about 2.1% over the next 3 years.

Gross Domestic Product Unemployment

Gross Domestic Product (GDP) is the total monetary value of Unemployment, similar to GDP, is one of the first indicators of goods and services produced within a nation’s borders in a given economic health. As mentioned above, consumer staples tend to time period. GDP functions as an indicator of economic health. be in high demand regardless of economic strength thanks to the Typically, when the nation's GDP increases so does the S&P 500, necessity of their products (e.g. food, beverages). However, as indicated in the graph below. consumers will shift their spending to low-cost private label

brands as unemployment increases. GDP vs SP500

19000 2350 The graph below shows US civilian unemployment levels over 2150 the previous 10 years. Since the great recession, unemployment 18000 has been cut by more than half and now lies at 4.9%.4 As 1950 unemployment falls, wages tend to increase. According to 17000 1750 Bloomberg, wages increased by 0.4% in July of 2016, which 16000 1550 allows for increased consumption of consumer staples, especially 1350 name brand goods. We expect unemployment to remain around 15000 4.9% over the next 6 months, with a slow drop to 4.75% in the 1150 longer term. With the decreasing of unemployment rate, the 14000 950 consumer power will relative has an increase, which will increase 1/4/2010 1/24/2012 2/12/2014 3/3/2016 the sale of our sector.

GDP SP500 Unemployment Rate

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 Source: FRED as private label spending decreased 10% from 2009-2012.2 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 2 questions on three economic categories: their own situation, their Interest Rates view on the short-term economy and their view on the long-term economy. It is created to assess the near-term customer outlook The Federal Reserve has the ability to change the interest rates at on personal finance and household spending. The data collected which commercial banks can borrow money from them. By in this poll is used to help evaluate the level of consumer optimism changing this rate, the Fed can increase or decrease the supply of or pessimism. The stock market is effected by the data from this money in the economy, which has an immediate effect on index either negatively or positively. If consumer sentiment has inflation and slight lagging effect on GDP growth. If commercial increased, it means that consumers are optimistic about the health banks are able to borrow money more cheaply, it means that they of the U.S. economy and will spend more money on discretionary are able to lend it to consumers at a lower rate as well. This entices goods. This is usually a good thing for the stock market. If consumers and businesses to borrow money to make big consumer sentiment has decreased, it means that the average purchases like cars, houses or capital investments, which is bene- consumer is pessimistic about the future of the U.S. economy ficial for the economy. Because of the benefits this brings to the which usually results in a decrease in the overall stock economy, when the Fed decreases the federal funds rate, the stock market. However, changes in in consumer sentiment have a market will usually increase. Due to the low betas of consumer minimal effect on the price of stocks in the consumer staples staples companies, a decrease in the federal funds rate has a sector as consumers tend to buy staple products regardless of the positive, yet lesser influence on the price of those stocks. This is economic environment. true especially because a lower interest rate generally influences more long-term investments, which are generally not considered Historically, the consumer sentiment survey has been a bit of a staples. lagging variable behind the general market trend. Looking at the graphs below it is visible to see that the index generally falls In response to the general market outlook does the FOMC change below 100 during times immediately following large drops in the rates. If they believe that the economy is growing too rapidly, then stock market and in the period right after as people are they will raise rates to attempt to reduce the supply of money in more cautious about their discretionary spending. As noted the marketplace to reduce capital investment and vice versa if the in earlier, consumer sentiment does not have a large influence on economy is slowing. Historically especially in recent decade, the the price of consumer staples stocks due to the necessity of the federal funds rate was lower than 5%, especially, since the great goods purchased at any time during the business cycle. That is recession the FOMC has set the rate at record lows. In 2015, Fed confirmed by looking at the below graph which shows that when rate was raised from 0% to 0.25%. In response to these all-time the consumer index was above 100, consumer staples prices were lows the market, and the consumer staples sector has been primarily stagnant, and following the financial crisis consumer growing incredibly quickly. The S&P 500 has even reached a new staples increased in value although consumer sentiment was all-time high. As we've seen in the past from a rising stock market, low. Currently, the consumer sentiment survey as of November is it is expected that the Fed will increase rates to attempt to slow 91.6, which means that the average U.S. citizen is pessimistic down the growth of the economy. Although there has been much about the direction of the economy. speculation during last few months' meetings, the Fed has generally kept the rate the same amidst global economic Consumer Sentiment Survey vs SP500 uncertainty. Currently the effective federal funds rate stands at 0.5%

Federal Funds Rate vs SP500

Source: University of Michigan

Source: Bloomberg 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.

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Consumer Stapes vs Federal Funds Rate

Source: Bloomberg Source: Bureau of Labor Statistics

Due to the most recent FOMC meeting and speech regarding their proposed intentions, there is much speculation about another rate The PPI is a family of indices that measure the average change in hike in the near future. Albeit a small rate hike is most likely to selling prices received by domestic producers of goods and occur in the next few months, the markets are already trying to services in the three stages of production: crude goods, price in the effect that such a hike would do to the bottom lines intermediate goods, and finished goods.8 Because PPI is reported for the companies of the U.S. market. We are expecting an before CPI, it can show signs of inflation before the CPI index. incremental hike in the next few months. This will have an effect PPI is important because it affects the input costs, which affects of decreasing the rate at which the S&P 500 has been increasing selling price and revenue. A lower PPI is better for the consumer as well as the rate at which the consumer staples companies have staples sector because it signifies lower input costs, thus leading been trading. If a rate hike were to occur, firms would be paying to higher margins and higher revenues. From Chart 1 below, we more for capital investments and consumers will be paying more can see that the total final demand and total final demand for in interest rates for things like cars and houses. Due to goods is -0.4%. This decrease is largely attributable to the total this, we expect a small decrease in the rate at which the consumer final demand for food falling -1.1%. 9 These data show that the staples sector has been increasing at 0.75% input costs are reduced for most consumer staples companies.

Inflation One-month percent changes in selected PPI final demand price indexes Inflation is the rate at which the general level of prices for goods 1 and services is rising, and, consequently, the purchasing power of 5 currency falling. Consumer Price Index (CPI) and Producer Price 0.5 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 0

Jul

Jan

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Oct

Apr

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Nov Mar

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

Sep'15 Sep'16

According to the U.S. Bureau of Labor Statistics report, over the -0.5 percent change percent 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 -1 which is between 0%-2%, a higher CPI is better for the consumer Final demand Final demand goods Final demand Service staples sector. CPI will influence the cost of our sectors a lot. With the CPI increased, the inventories cost will increase, in order to Source: Bureau of Labor Statistics keep profitable, consumer staples companies will increase their product price as well. If the price only rises up a little and the We expect that in 6 months the CPI inflation rate will decrease to demand for customers will not be significantly influenced, the 0.5% because we believe the Federal Reserve is likely to raise the companies will realize higher profit. If there is an uncontrolled interest rate by the end of the year. However, in 2-3 years we increasing inflation rate, the price of goods is sustained growth, believe the CPI inflation rate will steadily increase to 1.8%, which the demand of customers will decrease. All in all, the net profit of will be close to the Federal Reserve target of 2%. companies will have a negative influence.

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

4 compared to other sectors. The demand for consumer staples is producing organic food with the profit and access to enough inelastic and constant because consumers are unlikely to change supply of organic inputs. Companies have focused more on fewer their budget for food. Since consumer staples have a low beta of items and established the brand names to outrival their .68 historically, it is always preferable to be included to diversify competitors. portfolios.10 This sector can mitigate the loss during recession and even make profits by adjusting its volume due to its high dividend. Commodity Price Risk Management We believe it is a good time to invest in consumer staples since the risk tolerance of investors has decreased over years of market The meat processing companies are exposed to commodity price fluctuations. The consumer staples sector will not outperform the risk since it is the main component of the cost of goods sold. market going forward since the economic variables show that the Below are the lists of companies which directly compete with market is in recovery. Since the demand for consumer staples is Tyson Foods and how they manage the commodity price risk. inelastic and not well-correlated to the market, its performance would not benefit from the recovering market as much as other  Tyson manages this risk through the use of derivative sectors. 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 INDUSTRY ANALYSIS the future price.

 Pilgrim periodically seeks to enter into purchase Industry description commitments or financial derivative but has not designated the derivative financial instruments to Food Products is an industry within the Consumer Staples sector, mitigate commodity price risk.14 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  Sanderson Farms periodically enter into contracts to The agricultural products include crop growers, owners of purchase feed ingredients but it doesn’t use derivative plantations and companies that produce and process foods but do financial instruments or purchase market risk sensitive not package and market them. The packaged foods & meat is instruments. 15 producers of packaged foods including dairy products, fruit juices, meats, poultry, fish and pet foods. Consumer Demographics Trend

Hispanics Consumer Staples Sector Breakdown The population of Hispanics in U.S. is growing faster than any Agricultural other non-Hispanics. Their home dinning trend started to have Products, influence on the food product industry. Companies have released Tobacco, 2% Hispanic packaged food to attract the fast-growing population. 17%

Brewers, 1% Aging Baby Boomers Household Distilers & The aging baby boomer generation is concerning more about Products, Vintners, 2% healthy food. They are concerned about low saturated fat, Soft Drinks, 19% 20% cholesterol, and sodium and high in whole grains, protein, and calcium.16 Also, they are substituting red meat with other protein Drug Retail, 9% 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 Food 17 Distributors, the U.S. today. 1% Personal Red Meat Sales vs Poultry Sales in U.S.A Products, Hyper Food Packaged 2% Markets & Retail, Foods & Super 3% Meats, 17% Centers , 9%

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 Source: USDA 5

Smaller Households Threat of New Entrants: Medium and Steady Consumers have become more individualized in the U.S. The new company must pass the approval from the U.S. Currently, more than 50 percent of eating and beverage occasions Department of Agriculture and Environmental Protection Agency happen when consumers are alone.18 Also, 27 percent of to start business. Both departments have a strict standard to consumers are dining alone according to the Census Bureau.19 The protect and promote public health.22 Also, since preexisting individualized consumer group has affected the food industry and companies in Food Product industry made the long-term contract has had forced the packaged food industry to adjust their products with suppliers, it is difficult for newly entered companies to find in response to the new trend. In 2015, Tyson had successfully the new suppliers. Tyson Foods has entered long term contracts caught the trend increasing its packaged foods sales from 3.9 with various independent farmers. It had made more than 3,800 billion in 2014 to 7.8 billion.20 contracts for chicken, 3,770 for beef, and 2,100 for port in 2015.23

Packaged Food Revenue Changes Threat of Substitutes: High The treat of substitute is high in this industry since the market is 370. 10000 fully saturated. Customers can easily find substitutes for Tyson 360. 8000 Foods’ products in the stores. Even though the food products are differentiated but they are still substitutable by other products. To 350. 6000 reduce the threat, Tyson Foods has focused on establishing the 340. 4000 brands name. Their brand strategy is using the merged company’s brands to maintain the relationship with existing customers. 330. 2000

320. 0 Bargaining power of buyers: High 2011 2012 2013 2014 2015 The buyers have more power since there are many substitutions are available in the market. Customers often demand for lower Gross Market Value (B) price or healthier food and if Tyson Foods cannot meet their Tyson's Package Foods revenue (MM) requirements at right time, its customers will switch to other brands without any additional cost. Source: Euro monitor & Fact Set Bargaining power of suppliers: Low Porter’s Five Forces Analysis To reduce the power of suppliers, Tyson Foods has made long term contracts with suppliers. Since Tyson Foods is the largest Industry Rivalry meat processing company, the suppliers have less power to The food products industry has $453,839 of total market cap as of negotiate. According to Tyson Foods, the average length of the 4/13/2016. In 2015, Kraft Foods and H.J. Heinz merged and contracts is 15 years which makes it have more bargaining power formed the largest company in the food products industry with than other competitors such as Sanderson Farms and Pilgrims Kraft Heinz, the largest company, merged with holding a 21% which enter long term contracts only periodically.24 weighting. The second largest company is Mondelez International with 14.5% weighting. The top 10 largest companies account for Catalysts for Growth/Change a combined 78.4% market share in the food products industry.21 Consumer demand According to the World Databank, the population of USA keeps Food Products: Major Players as of 4/13/2016 0.8% growth rate in recent years, and 1.2% in world. The increased number of people means that he sales of food especially Conagra Campbell Hershey, of necessaries like meats will grow as well. Foods, 5% Soup, 4% 4% Hormel Others, 22% Population Growth: U.S. vs World Foods, 5% Archer- Daniels- Midland, 5% Tyson Foods, 6%

Kraft Heinz, Kellogg, 6% 21% Mondelez Internation Source: World Development Indicators General al, 15% Mills, 8% 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 Source: NetAdvantage 6

2016, the tax is expected to be decrease and will increase the Investment positives and negatives purchase power of middle class. Positive Shares of Global Middle Class Consumption, 2000-2050 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.

Source: World Bank Negative

Although the food products industry is a relatively stable market, Food safety and health some uncontrolled situations also will influence its growth. For People have high attention to the food safety all the time. example, agricultural products reduce on its harvest if there is According to a survey, consumers now link health, wellness, and harsh weather due to climate change. Furthermore, food product industries transparency with their definition of safety, and include industry is a mature industry, so it is difficult for companies to factors such as free from harmful ingredients (62%); clear and have great innovation and prompted sharp rising of stock prices. 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, Financial Statistics of Leading Competitors in Food which means this industry is much more likely to be impacted by Product Industry consumer concerns. If there is an exposure that shows food is unsafe, this kind of scandal will affect sales dramatically. Tyson JBS SA Sanderson Pilgrim's Hormel Market Cap 28.03B 9.68B 2.12B 5.35B 19.34B Today, the health and nutrition for food is another key selection ROA 8.19% 4.57% 10.60% 15.54% 12.49% criterion for people. For example, the organic food becomes a popular and profitable business. More and more traditional food ROE 16.82% 9.14% 12.97% 47.63% 20.02% companies such as General Mills are trying to diversify their EPS 4.11 0.42 6.24 1.84 1.54 portfolios to organic and natural food. In addition, more and more Revenue Per 97.47 38.21 121.96 31.51 17.56 people becomes vegan or vegetarian. In 2009, a tiny one percent Share of the US population reported eating vegetarian or vegan. In Profit Margin 4.28% 1.10% 5.19% 5.85% 8.96% 2015, 5% of the United States population is vegetarian and half of Operating 7.86% 4.00% 8.21% 9.49% 13.41% those people are vegan, and the number is keep rising. However, Margin veganism is not just for women. The outcome consumption of P/E 17.84 17.03 15.08 11.42 23.73 meat because of the increasing number of vegetarian will P/S 0.73 0.18 0.79 0.66 2.08 decrease.26 P/B 2.86 1.37 1.86 6.56 4.4

Emerging market Total Cash 0.53 1.91 10.76 0.16 0.72 Established markets still generate high profits for package food & Per Share Source: Yahoo Finance meat companies. However, because of the high economic development of Latin American and Asian Pacific countries, these Profit margin and Operating margins are the most important countries also can bring profits for food product industry. statistics to evaluate the companies in Food Product industry since Emerging markets are relatively underfed and the population in the market is fully saturated. If the firm cannot generate revenue emerging market is huge. In countries like India and China, cheap efficiently, it can operate business in long run. So the except JBS labor force and plentiful farmland are the favorable conditions for SA, four companies in the table above are in our investment list. the food products industry companies to expand.27 They have succeeded to differentiate from other competitors and

increased operating margin in the highly competitive market.

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COMPANY ANALYSIS 2016 3Q Operating Income & Margin

16% 400 Company Overview 14% 350 Tyson Foods, Inc. is an American Corporation operates as a food 12% 300 company worldwide with leading brands such as Tyson, Jimmy 10% 250 Dean, Hillshire Farm, Sara Lee, Ball Park, Wright, Aidells and State Fair. The company was established by John W. Tyson in 8% 200 29 1935. In 2001, it had expanded its business segments by 6% 150 acquiring IBP, Inc. which had the largest market share in beef packer and the second in pork processor business in the U.S to 4% 100 expand the business segment. In 2014, Tyson acquired the maker 2% 50 of Jimmy Dean sausage and Ball Park hot dogs for $8.5 billion.30 0% 0 In July 2014, the company sold its poultry business in Mexico and Beef Chicken Prepared Pork Brazil to focus on the domestic market.31 It generated $40.6 Foods Billion in the fiscal year of 2015 with 113,000 employees. Its main four business segments are Chicken, Beef, Pork and Operating Income Operating Margin Prepared Foods. The company raises and processes chicken products; process live cattle and live hogs; and fabricates beef and Source: Tyson 10Q 2016 pork carcasses into meat cuts. The company produces from fresh, value-added food to frozen and refrigerated food products.32 The Chicken products are primarily sold to grocery retailers, grocery Tyson processes live chickens into fresh, frozen and value-added wholesalers, meat distributors, warehouse club stores, military chicken products. Chicken products are distributed domestically commissaries, industrial food processing companies, chain to food retailers, wholesalers, food service establishments such as restaurants or their distributors, live markets, international export schools, the military and other food processors, as well as to companies and domestic distributors who serve restaurants, food international markets.32 Since it raises chicken itself, chicken service operations such as plant and school cafeterias, products are less volatile than other segments. This segment is convenience stores, hospitals and other vendors. 32 also expected to grow faster since consumers are replacing red meat which is linked to heart diseases and other health issues. As Product Lines, Raw Materials, and Sources of of 3Q 2016, chicken segment had recorded the highest operating Supply 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 Sales by Segment from 2013 to 3Q 2016 Foods has entered long term contracts with farmers. Other competitors such as Sanderson Farms and Pilgrims only enter the 100% contracts periodically since their market caps are much smaller 13% 13% 90% 15% 17% than Tyson’s.33 The average length of the contracts is 15 years 80% 9% 10% 19% 19% which guarantee the stable chicken supply at the fixed price. 70% However, the dependency on chicken products is expected to 60% decrease going forward because it is assumed that the recent 35% 30% 27% 50% 29% pending lawsuit will affect the chicken sector. The lawsuit claims 40% that consumers have been paying 50% more because of artificially 30% manipulated price. The operating margin for chicken sector is adjusted to be lower. 20% 41% 43% 41% 39%

10% Beef 0% The company processes live cattle and fabricates dressed beef 2013 2014 2015 2016 - 3Q carcasses into primal and sub-primal meat cuts and case-ready 32 Beef Chicken Prepared Foods Pork product. This product is also distributed throughout the same distribution channel as chicken segment. The beef segment of Source: Fact Set 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,

8 it is operating income had increased from $ -7 million in 3Q 2015 Also, Tyson has expanded its product lines by acquisitions. One to $91 million in 3Q 2016. The beef segment is expected grow at of the key acquisitions was Hillshire Brands which is expected to 2% in Q4 2016. create synergies of about $700 million in fiscal 2017.40

Pork Tyson processes live hogs and fabricates pork carcasses into Tyson Foods also has more facilities compared to its meat primal and sub-primal cuts and case-ready products.32 This processing competitors. Tyson Foods has a lower transportation product is also distributed throughout the same distribution cost per food products and high market share since their facilities channel as chicken and beef segment. Pork segment has lower are located close to highly populated areas and outnumber the volatility than beef segment does since it has more secured competitors. suppliers. It employs hog buyers who make purchase agreements 32 of various time durations as well as purchase hogs daily. Also, Tyson Foods Facilities Locations in U.S.A. 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. Source: TysonFoods.com

New Products Tyson’s success is dependent on anticipating changes in consumer preferences and dietary habits and successfully Sanderson Farms Facilities Locations in U.S.A. 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. Source: SandersonFarms.com Corporate Strategy In 2016, Tyson Foods has expanded a new business sector. It has Recent Earnings Release introduced True Chew, a line of beef, chicken, and ham-flavored In 3Q 2016, Tyson Foods generated sales of $9,403 million and dog treats to penetrate pet food market.39 However, it is expected operating income of $767 million. Although volume had to generate only small portion of revenue, since it is still in decreased from previous 3Q, port sales had increased in fact fledging. because of its increased price.

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Sales Changes from 3Q 2015 to 3Q 2016 However, 2016 is expected to be different from 2015 since the Sales Volume Avg. Price balance of feeder cattle has been stabilized. In 3Q 2016, Tyson 2016 2015 Change Change recorded a positive operating income in beef segment. Tyson has Beef 3783 4305 2.90% -14.60% announced its improved marketing strategy and branding plan for beef. 41 One of its solutions to survive in beef market is Tyson Chicken 2743 2757 -0.90% 0.40% Taste Makers, a line of chef-inspired meal kits for home delivery Prepared 1809 1810 1.90% -1.90% with Amazon Fresh service.42 This product includes uncooked Foods meat ingredients which are fresher and healthier. However, it Pork 1271 1207 -1.70% 7.20% would not dramatically boost the profits in beef segment since e- Source: Tyson 10Q 2016 commerce for food market is in its early stage. The chart below shows the operating income changes from 3Q Chicken segment is the real cash cow to Tyson Foods. Even 2015 to 3Q 2016. Operating income is more accurate indicator to though its sales are less than beef segment’s, its operation income evaluate performance of each segment since sales do not include was $380 million in 3Q 2016 which accounts for about 50% of the cost. the entire operation income of Tyson Foods. Chicken is the most lucrative segment with 13.9% of operating margin. Tyson will Operating Margin/Income Changes likely continue to make profits by focusing on chicken segment in from 3Q 2015 to 3Q 2016 4Q 2016. 3Q Operating Operating Margin Income Prepared Food is a rising business segment in Tyson Foods. This 2016 2015 2016 2015 segment has accomplished a remarkable success with $588 Beef 91 -7 2% 0% million of operating income in 2015 compared to $60 million Chicken 380 313 13.90% 11.40% losses in 2014. Tyson has successfully caught up the consumer trend by expanding prepared product variations throughout Prepared 197 207 10.90% 11.40% acquisitions. Prepared Food is expected to bring profits to Tyson Foods in 4Q 2016. Pork 122 64 9.60% 5.30%

Source: Tyson 10Q 2016 Tyson will face fierce competition in pork segment as more pork- processing plants get built, including some funded by hog farmers Beef segment shows a negative number in 3Q 2015 which means group.43 Tyson has invested in raising more hogs to stabilize the that as Tyson operates business in beef industry, it loses its supply. The operating margin had increased from 5.3% to 9.6% in money. The main reason of the negative number is the imbalance 3Q 2016. The port segment is expected to grow more since its between supply and demand of feeder cattle in 2015. Compared high price and enhanced operating margin. to chickens and hogs, feeder cattle take more time to be grown enough to be processed. This leads to the reduced sales volume of Competition beef segment and the increased price of beef made consumer shift Tyson Foods has intense competition with other food producers to chicken or other protein sources. and processors. The competition among Tyson Foods and its competitors are about the price, food quality, innovation, safety, Loss in beef segment is not just Tyson’s problem. JBS SA, the convenience, long term contract and brand identification. leading company in beef industry in U.S. also suffered loss of Compared to other food producers and processors, Tyson Foods $37.3 million for the fourth quarter of fiscal 2015. Since the has more advantages. For example, Tyson Foods is able to change market is still too big to be ignored, the two major companies based on the consumer preferences and dietary habits successfully likely compete each other to survive. However, they would focus develop and launch new products. on cost-efficiency rather than increasing the volume. The major competitors of Tyson Foods are Pilgrim’s Pride Feeder Cattle Price Changes from 2014 to 2016 Corporation, Hormel Food, Sanderson Farms, Mondelez 300 International and ConAgra Food. In general, Tyson Foods is the second best among these competitors from market capitalization. 250 The market capitalization of Tyson Foods is 28.03 billion, which 200 is only lower than Mondelez Intl but higher than other competitors. In 2015, they have the highest revenue and gross 150 profit among these competitors. However, the profit margin and 100 operating margin are the second lowest, which means Tyson Foods has relative low profitability. In addition, Tyson Foods 50 owned more stable labor contract and customer contract than 0 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

Source: Bloomberg supplier contract, for example, it has more than 6000 independent contract farms to grow chickens.

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Research and Development this reason, international companies have problems to penetrate Tyson Foods currently has 173 research and development team the Chinese market. Tyson Foods uses high technology that can members to work together for innovation, consumer product help people know where the livestock was slaughtered and when analysis, fulfilling emerging consumer needs and planning the the meat arrived in the store cooler.45 In China, a country with future of packaging for protein as they are developed. With many food safety problems, this action made people have more 100,000 square foot research and development facility and 19 confidence in Tyson Foods. research kitchens and a USDA-inspected pilot plant, Tyson Foods can work better to improve product development, to automate The problem in international market is that revenue is affected by manual processes in our processing plants and grow out the currency exchange rate. To reduce the volatility of currency operations, and improve chicken breeding stock.44 problem in international market, Tyson Foods has bought currency derivatives to hedge the foreign exchange risk. Catalyst for growth and change Pending Lawsuit Livestock disease One major threat for the Tyson Foods is outbreak of a livestock Tyson Foods and other chicken producers are accused of the disease (such as avian influenza [AI] or bovine spongiform chicken price fixation in October 8, 2016. Even though Tyson encephalopathy [BSE]). In 2015, with the bird flu out broke, Foods disputes the collusion, the lawsuit is highly convincing. 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. 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 Source: USDA, Economic Research Service portfolio can give a steady profit.

Emerging market  The operating income has increased from 3Q 2015 to 3Q Emerging markets are both a challenge and opportunity for Tyson 2016. Tyson Foods shows the signs of recovery. Foods. It wants to open the market in China and India, but it is a Negatives big challenge. In 2015, Tyson Foods finally sold meat production operations in Mexico and Brazil to JBS. S.A.  The food products industry is relatively low profitable and already in the mature stage, it is difficult to make a Although Tyson Foods had loss in Brazil and Mexico market, it huge profit by investing in Tyson Foods stock. has better performance in China by successfully understanding  Its low beta can be a weakness when the market is in the market. Demand for pork is the highest in China, and people strong performance. normally prefer to buy meat in the local market where sell freshly  Its debt rate is high compared to its competitors due to butchered livestock rather than processed meat in a cooler. For acquisitions in 2014 and 2015. Even though it hedged 11

the interest risk by purchasing derivatives, Tyson has Overall, the operating margin has been enhanced in all four still exposure to interest risk. business sectors but we have adjusted its COGS to 88% due to  The lawsuit against Tyson Foods of chicken price pending lawsuit against chicken price fixation. The lawsuit is fixation decreased the stock price. The operating margin highly likely against Tyson Foods so we have increased the for the chicken sector has been adjusted since it had been COGS.

increased abnormally since 2015. Also, the lawsuit is Research and Development highly likely against Tyson Foods which its sentence will According to the Q3 2016 Conference Call, Tyson Foods said it decrease the stock price again. 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 VALUATION ANALYSIS 0.18% of sales in 2016 and 0.2% of sales in 2017 and will increase 0.02% of sale per year later. Revenue Operating Income We decomposed Tyson’s revenue into four segments: chicken, pork, beef and prepared food. Our revenue forecast is based on We forecast the operating income of Tyson Foods will increase to the 10Q of the first three quarters in fiscal 2016 and economic 6.66% of sales by the end of fiscal 2016. Through the 10Q 2016 outlook. In order to predict 2016 revenue, we analyzed three 10Qs of Tyson, compared to last year, the operating margin increased of Tyson Foods. The sales volume had decreased in the previous in each segment. In chicken segment, the operating margin of 9 months due to the loss in Mexico and Brazil. Since Tyson Foods previous 9 months in 2016 was13.4%, beef was 1.9%, pork was doesn’t operate in Mexico and Brazil anymore, the sales volume 11.4% and prepared food was 10.9%. is expected to grow again in Q4 2016 and 2017. However, operating income of year 2017 is likely affected by the pending lawsuit. Since the lawsuit is highly convincing, the Although total sales had been declined, the operating income had COGS is adjusted to be highly. Although other business sectors been increased to enhanced operating margin. Operating income show that their operating margin has been increased, chicken had been increased from $563 in 3Q 2015 to $767 in 3Q 2016. sector still accounts for the largest proportion in operating income.

Even though we forecast the that the total revenue will be Debt decreased by 7.15% compared to the fiscal year of 2015, the company is not in a bad shape in terms of operation. In 2014 that Tyson had an acquisition with Hillshire Brands which made the sales of prepared food doubled in 2014 Quarterly Total Sales and 2015. However, it also created $7,535 million long term debt Q1 Q2 Q3 in 2014 and $6,010 in 2015. Through the analysis of 10K of 2015 10,817 9,979 10,071 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 2016 9,152 9,170 9,403 still be a large amount. We calculated the long-term debt by Source: Tyson 10Q 2016 calculating the average rate of long term debt to total asset in previous 2 years and then adjusted it by adding 3%. Quarterly Operating Income Q1 Q2 Q3 Weighted Average Cost of Capital (WACC) 2015 509 547 563 2016 776 704 767 The weighted average cost of capital (WACC) estimation is Source: Tyson 10Q 2016 consisted of equity and debt in Tyson.

As shown in the above tables, Tyson Foods had increased its Cost of equity (Re) operating margin every quarter, so they had increased operating We used the Capital Asset Pricing Model (CAPM) to estimate the income in fact. Therefore, we decided our target price based on cost of equity. We used 30 Year Treasury Bond rate as risk free DCF model since it uses free cash flow generated by operating rate, which was 2.93%. We used 7.93% as market rate of return. income. Examining total revenue is not the right method to judge For the Beta, in Bloomberg, we found the 1-year, 3-year and 5- the stock price of Tyson Foods. year beta for daily, weekly and monthly. Because daily returns are often noisy and monthly returns are less volatile, we take monthly Cost 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 goods sold The cost of goods sold in Tyson Foods showed a decline trend Cost of debt (Rd) since 2012, which had been decreased from 92.21% of sales to We used 30 years cooperate bond rate from FINRA as our pre-tax 88.45%. From 10Q of the third quarter, Tyson Foods reported that cost of debt which was 4.31%. We used 41.9% as our marginal the cost of goods sold was only 86.99% of sale in previous nine tax rate, so we got the after-tax cost of debt is 2.47%. By adding months of fiscal 2016. the operating leases, long-term debt and current portion of long- 12 term debt, we got total value of debt, which is $7,154 million and P/E Valuation Candidates the weighted of debt is 25.67%. Market Cap Ticker Company (Billion) Through the calculation of weighted average cost of capital, we estimated our WACC is 5.27%. CAG ConAgra Foods, Inc. 15.29 Campbell Soup Discounted Cash Flow Model and CPB Company 16.45 Economic Profits Model (DCF & EP) GIS General Mills, Inc. 36.1 HRL Hormel 18.41 In discounted cash flow model and economic profits model, we calculated CV growth first and got 0.21%, since it was lower than HSY The Hershey Company 20.73 GDP, we used 2.1% which a little bit higher than GDP as our CV K Kellogg Company 25.39 growth. We take 2020 as our continuing value year. The KHC Kraft Heinz Company 98.89 NOPLAT, Invested Capital and cost of equity are the major factors influencing our share price, through these we got the CV MKC McCormick Non Vtg 11.54 ROIC and WACC to calculate the free cash flow and economic SAFM Sanderson Farms 1.89 profit in 2020 CV. Source: Yahoo Finance

Because of the acquisition in 2014, Tyson Foods had large amount Kraft Heinz company is deleted since its market cap is too larger of debt in 2016 and future years we predict. After we got value of than other competitors. Sanderson Farms is also deleted since it operating asset, through adding value of non-operating asset and has the lowest market cap and the lowest P/E ratio. The target reducing the value of debt, ESOP and other, we got the value of prices of the P/E valuation for 2016 and 2017 are $80.58 and equity and share price. The discounted cash flow and economic $78.16 respectively. The prices are modestly different from the profit model we have provide us the stock price of TSN will be forecasted price of DCF and EP models since this model expanded $62.24, and the adjusted price to 2 December 2016 is $62.63. its industry from the meat to overall food processing. Since the meat industry has only few private companies to compare, we We have decided DCF model is the most accurate indicator for determined this forecasted price of the P/E valuation is less Tyson Foods stock price since its calculation is based on the free accurate than the DCF and EP calculation. 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. SENSITIVITY ANALYSIS Dividend discounted model (DDM) We included sensitivity analysis to find out the impact of changes The intrinsic stock value of Tyson Foods provided by dividend in two variables on the stock price. The four sensitivity tables discount model is $63.29, and the adjusted price is $63.69. We got show the changes in two variables in each scenario below. 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 Marginal Tax Rate & Pre-Tax Cost of Debt basic weighted average shares. Because we forecast that the net income and shares outstanding will have a stable increasing, we The industry average of Debt to Equity ratio in consumer got a relative higher EPS, which was 3.89 in 2020. Tyson’s discretionary in 2015 was 0.1. The Debt to Equity ratio of Tyson dividend per share increased since 2011, which is 0.16 in 2011 Foods in 2015 was .69 which is unusually high compared to and increased to 0.45 in 2015. We predict that the dividend would competitors. The company had aggressively expanded its continue to increase in next five years, which would be 0.6 in businesses by acquisitions in 2014 and 2015, so the pre-tax cost 2015, and increased 0.05 each year in future 5 years. Then we of debt rate is an important variable to measure the stock price of used dividend discounted model to this the intrinsic value. Tyson Foods. Another variable related to pre-tax cost of debt is marginal tax rate. Since the new president promised a huge cut in However, DDM model doesn’t provide any useful information the corporate tax rate, this sensitivity analysis table shows how about Tyson Foods, since its dividend yield is too low. The current the tax rate affects the stock price. The 3% decrease in the dividend yield of Tyson Foods is 0.9% which is considerably low marginal tax rate would increase the stock price by about $5 compared to the food industry average dividend yield of 2.49%.46 assuming Cost of Debt is constant.

Relative P/E Valuation Equity Risk Premium & Beta

Since there are not enough direct competitors for a relative P/E Since Tyson Foods had increased its debt to acquire Hillshire valuation, the industry has been expanded to the overall food Brands, the company beta had been affected by its changed cost products industry. The 7 companies have been selected for the structure. The goal of this analysis is to find out how much the valuation test and two companies have been deleted

13 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.

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Reference

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45 Singh, S. (2016, March 8). Buying Chicken With a Smartphone: Tyson Goes High-Tech in China. 43 Bunge, J. (2016, August 08). Tyson, Helped by Prepared Foods, Raises Outlook. Retrieved Retrieved September 20, 2016, from http://www.bloomberg.com/news/articles/2016-03- September 20, 2016, from http://www.wsj.com/articles/tyson-helped-by-prepared-foods-raises- 08/buying-chicken-with-a-smartphone-tyson-goes-high-tech-in-china outlook-1470660096 46 Dividend (2016). Dividend by Sectors. Retrieved from http://www.dividend.com/how-to- 44 Research & Development. Tyson Foods. September 20, 2016, Retrieved from invest/comparing-dividend-stock-sectors-by-yield/ http://www.tysonfoods.com/innovation/research-and-development

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Tyson Foods Weighted Average Cost of Capital (WACC) Estimation WACC = Re(E/V)+Rd(D/V)+Rpfd(PFD/V)

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

Debt Operating 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 Tyson Foods Key Assumptions of Valuation Model

Ticker Symbol TSN Current Share Price $56.12 Current Model Date 12/2/2016 Fiscal Year End Sep. 30

Pre-Tax Cost of Debt 4.31% Beta Beta 0.66 Daily Weekly Monthly Risk-Free Rate 2.93% 1 0.397 0.392 0.086 Market 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 Foods Sensitive Analysis

Pre-Tax Cost of Debt $ 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 74.84 35.90% 73.31 72.82 72.35 71.87 71.41 70.94 70.48 38.90% 68.61 68.17 67.73 67.30 66.87 66.45 66.03 Tax Rate 41.90% 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 56.82 47.90% 53.96 53.64 53.32 53.00 52.68 52.37 52.06 50.90% 48.88 48.59 48.31 48.03 47.75 47.47 47.19

Beta $ 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 65.47 4.60% 75.52 73.07 70.73 68.50 66.37 64.33 62.38 Equity 4.80% 72.34 69.94 67.65 65.47 63.39 61.40 59.50 Risk 5.00% 69.36 67.01 64.77 62.63 60.60 58.65 56.79 Premium 5.20% 66.55 64.25 62.05 59.96 57.97 56.07 54.25 5.40% 63.90 61.64 59.50 57.45 55.50 53.64 51.86 5.60% 61.40 59.19 57.08 55.08 53.17 51.35 49.61

COGS/Sales $ 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 44.69 1.70% 68.53 64.84 61.14 57.44 53.75 50.05 46.35 1.90% 71.55 67.66 63.77 59.88 56.00 52.11 48.22 CV Growth 2.10% 74.95 70.84 66.74 62.63 58.53 54.42 50.32 2.30% 78.81 74.45 70.10 65.75 61.40 57.05 52.70 2.50% 83.22 78.59 73.95 69.32 64.69 60.06 55.42 2.70% 88.32 83.36 78.40 73.45 68.49 63.53 58.57

CV ROIC $ 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 77.65 5.07% 58.28 62.62 65.97 68.64 70.81 72.61 74.12 5.17% 55.55 59.74 62.97 65.54 67.63 69.36 70.82 WACC 5.27% 53.00 57.04 60.15 62.63 64.65 66.32 67.73 5.37% 50.60 54.50 57.51 59.90 61.85 63.47 64.83 5.47% 48.35 52.12 55.02 57.34 59.22 60.78 62.10 5.57% 46.22 49.87 52.68 54.92 56.74 58.25 59.53 Tyson Foods Revenue Decomposition In 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 Foods Cash Flow Statement In 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 Foods Balance Sheet In Millions of USD except Per Share Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV Asset Cash, 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 Foods Income Statement In 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 Foods Common 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 Foods Common Size Balance Sheet (Total Sales Basis) Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV Asset Cash, 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 Foods Value Driver Estimation In 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 Foods Discounted 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 Model Fiscal 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 1441 Free Cash Flow Continuing Value 35,648.22 BEG IC 12658 13509 13247 13904 14766 Periods to Discount 1 2 3 4 4 EP 678 664 708 699 663 Discount 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 4 Value 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 Foods Dividend 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 0.75 CV 68.27 Discount period 1 2 3 4 4 Discount factor 1.06 1.13 1.20 1.27 1.27 Discounted 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 Foods Relative Valuation Models EPS EPS Market Cap Ticker Company Price 2016E 2017E P/E 16 P/E 17 (Billion) 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 11.54 SAFM 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 Tyson Foods Key Management Ratios Fiscal Years Ending Sep. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020CV Liquidity Ratios Working 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 Ratios Total 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 Ratios Debt 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 Ratios Net 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 Ratios Dividend 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 Operating Fiscal 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 101 2017 98 2016 80 2015 69 2014 72 2018 72 2017 56 2016 46 2015 47 2019 48 2018 39 2017 27 2016 32 2020 39 2019 30 2018 16 2017 21 Thereafter 111 Thereafter 104 Thereafter 78 Thereafter 55 Total Minimum Payments 493 Total Minimum Payments 416 Total Minimum Payments 333 Total Minimum Payments 328 Less: Interest 65 Less: Interest 57 Less: Interest 44 Less: Interest 38 PV 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 Lease Year 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 96.8 2 98 90.1 2 80 73.5 2 69 63.4 2 72 66.2 3 72 63.4 3 56 49.3 3 46 40.5 3 47 41.4 4 48 40.5 4 39 32.9 4 27 22.8 4 32 27.0 5 39 31.6 5 30 24.3 5 16 13.0 5 21 17.0 6 & beyond 39 82.9 6 & beyond 30 76.7 6 & beyond 16 55.9 6 & beyond 21 41.3 PV 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): 14,735,065 Average Time to Maturity (years): 7.10 Expected 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 2,075,361 Average 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 -597,499,210 Expected 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) 369,000,000 363,803,444 358,348,815 352,626,953 346,628,376 Plus: Shares Issued Through ESOP 2,075,361 2,075,361 2,075,361 2,075,361 2,075,361 Less: 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 TSN Current Stock Price $56.12 Risk Free Rate 2.93% Current Dividend Yield 0.87% Annualized St. Dev. of Stock Returns 27.10%

Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding 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