Tyson Food (TSN) Potential 30% Upside If Tariff Assist The Stock!
Tyson Foods: A Potential Buying Opportunity?
Tyson is a major player in the food industry, and with its stock down about 50% from all-time highs, it may be worth considering as an investment. While Tyson has demonstrated solid long-term growth, much of it comes from acquisitions rather than purely organic expansion. Fortunately, the company can afford these acquisitions, maintaining its debt level around $8 billion. Its share count has remained relatively stable, with occasional buybacks.
Why Has Tyson’s Stock Declined In 2023?
The primary reason for the stock’s decline is margin compression. Tyson’s gross profit margins, which were typically in the high 10% range, have dropped to around 4%, with profit margins even turning negative. This raises the question: Is this a temporary issue or a long-term challenge for the industry?
Looking at competitors like Pilgrim’s Pride, which has a smaller market share and a more limited product range, we see a similar trend. Their gross margins have also declined, indicating that this may be an industry-wide issue rather than a company-specific problem. Tyson, in particular, has been hit hard due to its reliance on beef, which has faced significant challenges.
Earning Overview
Tyson Foods reported its first-quarter fiscal 2025 results on February 3, 2025, showcasing notable year-over-year growth. The Growth is Flat at around 1%.
Earnings Per Share (EPS): Adjusted EPS reached $1.14, surpassing analyst expectations of $0.79. Revenue: The company reported a 2.3% increase in revenue, totaling $13.62 billion, exceeding the anticipated $13.46 billion.
Fundamental Analysis
Tyson Foods (TSN) has experienced a notable decline in earnings per share (EPS) over recent years. In 2022, the company reported an EPS of $6.93, which decreased from $10.42 in 2021. As of the latest financial reports, the trailing twelve months (TTM) EPS stands at $0.99.
Despite these challenges, Tyson's stock has shown resilience. In November 2024, the company reported fourth-quarter adjusted EPS of $0.92, surpassing analysts' expectations. This positive performance was attributed to higher prices in beef and chicken sales. As of February 5, 2025, TSN is trading at $57.01, reflecting a slight decrease of 1.26% from the previous close.
The decline in EPS can be attributed to several factors, including tight U.S. cattle supplies exacerbated by drought conditions, which have led to higher livestock prices and impacted profit margins. Additionally, fluctuations in feed and transportation costs have influenced the company's profitability.
Examining Tyson’s Business Segments
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Prepared Foods: This is Tyson’s most profitable segment, and revenue has slightly increased due to higher volume. However, pricing has been adjusted downward, indicating weaker consumer demand. Despite this, margins have remained stable, suggesting resilience in the long run.
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Chicken: While both volume and pricing are down, the company has achieved higher margins in this segment, which is a positive sign.
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Beef: Sales have increased slightly, but margins have shrunk dramatically, resulting in losses in this segment.
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Pork: This segment has performed relatively well, but Tyson’s various protein businesses tend to be cyclical, with different segments performing better or worse at different times.
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Chicken: Sales rose by 0.8% to $4.07 billion, driven by a 1.5% increase in volume, despite a 0.7% decrease in average prices. Beef: Sales increased by 6.2% to $5.34 billion, with a 5.6% rise in volume and a 0.6% uptick in prices. Pork: Sales grew by 6.6% to $1.67 billion, primarily due to a 7.0% increase in prices, while volumes saw a slight decline of 0.4%.
Guidance
Tyson Foods has raised its fiscal 2025 sales forecast, now expecting revenue to be flat or up 1% from the $53.3 billion reported in 2024, reflecting confidence in ongoing demand for beef and chicken products. Adjusted Operating Income: Tyson has raised its expected range to between $1.9 billion and $2.3 billion, up from the previous estimate of $1.8 billion to $2.2 billion. However, the company remains cautious due to potential impacts from tariffs imposed by the U.S. on Mexico, Canada, and China, as well as tight supplies of U.S. cattle.
Risks and Challenges
One of the largest meat producers in the U.S. is preparing for potential disruptions to its pork and chicken exports as broad tariffs threaten its key trading partners.
Tyson CEO Donnie King told analysts during a Monday earnings call that the company, which exports pork and certain chicken parts to Canada and Mexico, has been "making adjustments" to its operations in anticipation of the planned tariffs. While the tariffs officially took effect over the weekend, they are currently on hold.
"Our main concern, and what we've been contingency planning for, is pork exports to Mexico," King said. "We also export some chicken—specifically, a couple of parts." He noted that the company has a smaller volume of meat shipments heading to Canada.
President Donald Trump has delayed the implementation of 25% tariffs on Canada and Mexico for 30 days, allowing time for negotiations on economic agreements aimed at strengthening U.S. border security and combating drug trafficking, including fentanyl.
Market Sentiment
Tyson’s current struggles seem more reflective of industry-wide issues rather than fundamental flaws in the company itself. While profitability is currently weak, Tyson remains financially stable, with much of its cash flow going toward dividends. The company has slowed dividend growth due to recent struggles but is likely to resume increases once industry conditions improve.
Technical Analysis
For TSN, recent price action suggests that the $56.25 level, today's intraday low, may act as immediate support. Conversely, the $58.15 level, today's intraday high, could serve as immediate resistance. If the stock breaks below the support level, the next significant support might be around $55.00, a level previously tested in recent trading sessions. On the upside, surpassing the $58.15 resistance could lead to a test of the $60.00 level, which has historically acted as resistance.
Valuation
If Tyson’s margins recover to 2021 levels, bringing free cash flow back to around $7 per share, the stock currently trades at a ~9x multiple, making it an attractive investment.
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Bull Case: If free cash flow reaches $8 per share with 8% growth, a 15–18x multiple would value the stock at $130, presenting a fantastic opportunity.
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Base Case: With $7 per share in free cash flow, 6% growth, and a 15x multiple, the stock could be worth around $83, making the current $57 price a decent buy.
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Bear Case: If free cash flow remains at $5 per share with only 4% growth and a 12x multiple, the stock could be worth $42, implying further downside risk.
Conclusion
Tyson may have been a great buy a few months ago at around $45, closer to the lower end of its valuation range. At its current price, it’s not a bad buy, but there are still some risks to consider. I’ll keep it on my watchlist, and if the stock dips further, I may consider adding it to my portfolio. While the upside is solid and the downside appears limited, patience is key.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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- snoozii·02-05 13:10Interesting indeedLikeReport