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Released on Tuesday, June 12, 2012, 12:13 PM ET

Pittsburgh, PA (SpeculatingStocks) - Tyson Foods, Inc. (NYSE:TSN) announced on June 8th, 2012 that it would issue senior debt notes worth a total of $1-billion in an attempt to refinance their current senior notes totaling $810 million at an interest rate of 10.5%. The new notes will carry a rate less than half that amount at 4.5% and will give Tyson Foods more "financial flexibility", or so its management claims.

There is one fowl problem here though—aren't there other places that Tyson could potentially retrieve the necessary funds? Indeed there is, in the company own inventory. According to TSN's quarterly report issued for the months ending March 31st, 2012, Tyson has a total inventory of $2.6 billion. According to the business model, Tyson is and always has striven to be a vertically integrated firm, so it should have some inventory considering it is a protein-processing and distribution company-—one would expect a large amount of livestock to encompass this balance sheet item. However, approximately two-thirds of this line-item is composed of what six-sigma lovers call 'operational ineffectiveness'.

Listed in the TSN 10-Q, $678 million of inventory is allotted to processed poultry and prepared foods, $659 million to processed beef and pork, and another $397 million to additional supplies and other items: a total of $1,734 million in restricted inventory. Only $888 million is allotted to livestock, and in an age of operational effectiveness, just-in-time inventory and lean production schedules, such inventory is scarcely acceptable. Consequently, TSN is operating at a strategic disadvantage to potential competitors who are more lean-minded. It costs money to store frozen and processed goods, not only that but inventory ties up free-cash-flow capabilities, cash flows which could be used to pay down outstanding senior debt obligations and overall reducing the company's semi-annual interest payments to a minimum—increasing EPS.

What's worse is that TSN is already operating at low margins due to high-inflationary changes in the price of inputs. And yet, the years old method of hedging with futures is employed by Tyson. By purchasing futures on commodities of input and, in some-instances, their outputs, TSN has already hedged against the inflation, any costs ' lost' will be subsequently reduced or entirely made-up by the futures hedge.

It would seem otherwise that Tyson has simply been over producing, not innovating to produce operational effectiveness and reduce costs. Steam-lining their production will allow them to increase margins over the long-term as well as operate on a cost-leadership standard—a fitting strategic position for the largest protein distribution company in the world.

If TSN does not strive to alter its operations, it would most likely serve as a poor candidate for investment in the long-run, as more operationally effective firms consume the left-over market segments not fulfilled by Tyson; as they consume profits Tyson's control will slip. TSN is on a precipitous slippery slope, perhaps refinancing is a necessary endeavor, but so is process innovation, one at which TSN needs to take a serious look. Constant refinancing doesn't pay-off the debt, it simply ignores it—might as well treat it as preferred stock.

TSN is currently trading at $18.84 per share (4:00 PM, June 11th, 2012), with a market capitalization of $6.89 billion and a price that is 11.57 times earnings, which are $1.63 per share.

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