To The Moon

Summary

• Investors may see the 36% decline in stock price over the last year as an opportunity to invest in a long-standing dividend stock but should remain cautious of weakening margins.

• The company, the world's second-largest processor and marketer of beef, chicken, and pork, is struggling with low gross profit margins for chicken, beef, and pork in FY 2023.

• Despite an upward trend in revenue and net income over the long term, headwinds have weakened the outlook for FY 2023.

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Tyson Foods, Inc. (NYSE:TSN), the world's second-largest processor and marketer of beef, chicken and pork, is facing a difficult situation as all three of its meat products are expected to have near zero or negative gross profit margins, a trend not seen in a decade. This has led to a 35.95% drop in the company's stock value over the last year. Some investors may view this as a good opportunity to buy into a long-standing dividend stock that historically provided generous gains. As a cyclical commodity stock, Tyson Foods has had highs and lows in the past, rewarding investors on the upturn. However, current market factors such as high input prices, declining beef cow supply, increased competition, geopolitical events and legislation continue to strain the company's performance.

Stock trend to date (SeekingAlpha.com)

Additionally, Tyson Foods has high capital expenditure during a weak market, and we are seeing a decline in earnings and cash flow. While this cyclical stock is likely to improve, it is risky due to a large amount of debt and a weak near-term growth forecast. Therefore, I recommend a wait-and-see hold recommendation ahead of the upcoming Q3 2023 Earnings release on August 7.

Company overview

Tyson Foods is a giant; it is the largest exporter of beef in the USA and the world's second-largest processor and marketer of beef, chicken and pork after Brazilian peer JBS $JBS S.A.(JBSAY)$. The company generates its income through four main segments, namely Beef, Pork, Chicken and Prepared Foods, as described below across the last three and six-month periods comparing revenue of FY 2023 to FY 2022. We can see a YoY decrease over the previous quarter and only a slight increase over the last six months.

Revenue segments (sec.gov)

Demand for meat is stable and expected to grow 7.1% between 2022 and 2029.

Global meat market (Maximizemarketresearch.com)

Gross profit margin in decline

However, in this industry, we must consider that meat is a commodity which will see more or less profitability depending on various market factors, such as input prices, competitors and legislation. Due to market headwinds from factors such as low chicken commodity prices, high input costs, and the temporary HPAI export ban's impact, the company has seen a significant YoY decline in net income across its meat segments.

Net income over three and six months 2023 (sec.gov)

The business profitability is highly dependent on low input costs and production expenses relative to alternative food sources. Gross profit TTM is currently at a nine-year low of 8.29%.

Gross profit margin (SeekingAlpha.com)

Ideally, we want to see signs of the margin improving before investing, and if we look across the historical trends and the capital expenditure into operational efficiencies, we can expect the upward cycle to return; however, this will not be in the near term in our view.

Weak forecast for FY 2023

The forecast for FY 2023 looks grim due to the challenging market environment. The margins for chicken, beef, and pork are expected to be around zero, while the prepared food margins will remain unchanged. Unfortunately, this won't be enough to generate a positive cash flow. The company is making significant investments through its capital expenditure, but the poor market conditions are delaying cash flow. Additionally, the higher interest rate expenses have increased FY 2023 expense predictions by $10 million.

Guidance for FY 2023 (Investor presentation 2023)

Financials and valuation

Tyson Foods has had a steady and upward-trending top line over the last five financial years. Its bottom line could have been more consistent. However, it remained positive due to its diversification strategy. Due to the number of market headwinds impacting all its meat segments in 2023, the company has downgraded its FY 2023 forecast. Below, we can see the Revenue has been upward trending over the long term and is currently $53.6 billion TTM.

Annual revenue (SeekingAlpha.com)

The company's net income has been positive, but it hasn't always been consistent, which is expected for commodities that are greatly affected by rising production costs. Over a ten-year period, we can observe that the net income has increased. However, the latest TTM net income stands at $1.507 billion, which is lower than the $3.23 billion recorded for FY2022.

Annual net income (SeekingAlpha.com)

While the overall trend has been positive, levered free cash flow has shown inconsistency over time. Moreover, the current levered free cash flow stands at a negative $375 million TTM, a concerning sight for investors.

Annual levered free cash flow (SeekingAlpha.com)

The company currently has $550 million in cash and has been working to decrease its total debt, which was previously over $11 billion but now stands at $8.93 billion. Furthermore the company is in a good position to cover its short-term liabilities with a current ratio of 1.66.

For the past 31 years, Tyson Foods has been providing investors with a quarterly dividend that they have consistently increased by double digits over the last five years at 11.05%. The stock's FWD yield is 3.65%, and the ex-dividend date is set for August 31, 2023. While the payout ratio stands at 42.92%, if we look at the forecast for FY 2023, this is likely to increase due to lower earnings forecasts, and free cash flow is expected to be negative for FY 2023.

Dividend overview (SeekingAlpha.com)

The stock price has gone down by 35.95% in the past year and is currently trading below its average price target of $61.33. There isn't much short interest in the stock, with only 2.07%. However, it has performed better than some of its industry competitors over the last decade. It's worth noting that there is a general downward trend in the packaged foods and meat industry due to market conditions.

Ten year price returns versus peers (SeekingAlpha.com)

The company has reduced its forecast for FY 2023 due to market challenges. These challenges could further reduce the already low-profit margins. Compared to other companies in the same industry, the stock has a high FWD price-to-earnings ratio of 42.34, significantly above the median of 21.09 for the consumer staples sector. Given the anticipated decline in earnings and cash flow in the near future, it might be wise to wait for market conditions to improve before investing in this stock.

Relative peer valuation (SeekingAlpha.com)

Risks

It's important to be cautious when considering investing in a poorly performing company with high debt, likely to continue underperforming due to market conditions. Tyson Foods relies on selling commodities and is vulnerable to factors such as competition, regulations, and input prices. The company has lowered its forecast for FY 2023, and it is uncertain when the market will recover. Earnings are expected to decrease and cash flow to reduce, which could impact its dividend program in the future. While the stock has historically been cyclical with rewarding performance upturns, there are strong headwinds in the industry that must be considered due to their significant impact on business performance.

Final thoughts

Investors may be tempted to invest in a long-standing dividend stock due to a significant drop in the company's stock price in the last year. However, it is important to note that the company is currently struggling with profit margins in its key meat segments. The management team lowered its forecast for FY 2023 due to ongoing headwinds. As such, it may be wise for investors to exercise caution and hold off on investing until they see a performance turnaround. A hold rating ahead of the upcoming Q3 Earnings Release is recommended.

Source: Seeking Alpha