Tyson Foods (TSN) is a multinational food company, known as the world’s second-largest processor and marketer of chicken, beef, and pork.
I am bullish on the stock. (See Insiders’ Hot Stocks on TipRanks)
Food Market Outlook
The livestock market seems stable, and processed meat & poultry should continue to do well for the next year due to pricing.
Although meat prices have been elevated during this inflationary period, livestock prices tend to move opposite to grains prices because livestock farmers tend to increase their supply during inflationary periods to match the rising fixed input costs.
We’ve not yet seen this divergence in price adjustments from Tyson Foods, perhaps because the company wanted to capitalize during a period of high consumer disposable income.
Bank of America sees consumer spending slowing down.
“With the full month of July data, we calculate the seasonally adjusted change from June to July. Total card spending was down 1.3% on a month-over-month seasonally adjusted basis (mom sa),” BofA economist Michelle Meyer wrote in a note. “Slicing the data further, retail sales ex-autos were down a more notable 2.4% mom sa.”
As marginal utility fades into 2022, you can expect softer pricing from Tyson Foods, and it’s perfectly capable of coping with narrower margins at a gross margin of 13.4%.
Earnings Analysis, Guidance
The firm beat its Q3 earnings estimates and posted a 24.6% year-over-year increase in revenue. Furthermore, adjusted operating margins released at an operating margin of 10.8% versus a 7.4% estimate, and its interest coverage ratio now exceeds double figures (10.1).
The company upgraded its full-year guidance, and anticipates sales to approximate $46 billion to $47 billion ($45.2 billion in previous consensus) in Fiscal Year 2021.
Tyson’s plans to expand capacity with a new fully cooked plant in Danville, Virginia, that could achieve further economies of scale. The prospect of automating the bulk of its operations is also a significant value add, and could reduce operating costs significantly.
With recent developments, the firm should sustain its earnings quality, which makes for a great earnings-driven stock.
Dividend Analysis
The stock is in good shape with a forward dividend yield of 2.2%.
If you choose to opt for the stock, you’ll also be investing in a company with a payout ratio 52.4% lower than the industry average, and a cash from operations margin 611.9% higher than the industry average.
These statistics combined suggest that there’s capacity at bay, and that there will likely be dividend increases in future quarters.
Inherent Risks
According to the TipRanks algorithm, the only risks you’ll be facing are systemic. We all know of the supply chain bottlenecks, but that’s a temporary issue.
The genuine concern is the Biden administration’s intent to implement pricing constraints on large food companies to allow for better industry health, with smaller firms being given the opportunity to enter the market.
The second related risk is due to wage demands; the U.S. labor shortage is forcing Tyson Foods to pay out $200 lump sums to employees to get vaccinated. In addition, employees are also demanding extra sick leave and flexible work hours.
Both of these risks are ones the food producer should be able to deflect. Tyson has significant negotiating power over its suppliers, which means it can pass through costs of pricing constraints.
Furthermore, labor demands are nothing new. As the marginal utility of capital diminishes, labor negotiating power ought to strengthen again.
Wall Street’s Take
Wall Street thinks the stock is a Moderate Buy, with an average price target of $89.75, which suggests 12.9% in upside potential.
There are currently two Buy ratings, two Hold ratings, and zero Sell ratings on the stock.
Concluding Thoughts
Tyson Foods stock looks like a solid investment from both a value appreciation and dividend perspective.
Investors need to be realistic about upside, as this is a stock with a beta of only 0.81, but its returns could still beat the S&P 500.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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