To The Moon

Tyson Foods, Inc. (TSN) is much more than a chicken supplier. The company produces profits and good revenue.

I am bullish on the industry and convinced TSN stock has the potential for producing greater future returns for retail value investors.

Always in Demand

People eat in good times and bad. Chicken consumption defies inflation and recessions. Food or paint are essential consumer products. People always need both, if not today then tomorrow. Second, food never loses value regardless of its cost. The frosting is Tyson sells food people like to eat.

The outlook from management for each segment of the business is strong:

Beef

We anticipate another strong year with an adjusted operating margin at the upper end of 9% to 11% in fiscal 2022. We expect the first half of the fiscal year will be stronger than the second half as a combination of higher utilization and demand for cattle may result in a narrowing spread.

Pork

We believe our Pork segment's adjusted operating margin will be 5% to 7% in fiscal 2022.

Chicken

We anticipate an adjusted operating margin of 5% to 7% for fiscal 2022 as our adjusted operating margin is expected to achieve this on a run-rate basis by the middle of the year resulting in an overall stronger performance in the second half of the fiscal year.

Prepared Foods

We believe our adjusted operating margin will be at the upper end of 7% to 9% in fiscal 2022. We will remain disciplined in our pricing initiatives to ensure that additional inflationary pressures are mitigated by sales price increases.

Shares are Tough Like Bull

The share price is up 53% over the past five years, almost 16% over the last 12 months, and 4.4% since January 1st. The shares are holding up even as the market stumbles and tumbles. TSN is less volatile than the market. Its beta is down to 0.56; that means TSN is far less volatile than the rest of the market. The average price target in 2022 is $100 per share; that represents a 7.5% change from the last price we looked at of $92.50.

It will be a very attractive buy on any dip into the $80s if that happens. Short interest is less than 2%. Meanwhile, investors can collect a 2.03% forward yield on the $1.84 dividend. That is higher than the sector average of 1.514%.

I was recommending the stock to retail value investors during the darker days of the pandemic when the market took its biggest hits (March ’20 and July '21). Commentators characterized slaughterhouse and meatpacking plant management as functioning cui bono. Activists called on Tyson to shut down slaughter and processing plants.

Management made some flubs. Ultimately, management was able to keep the nation’s food supply safe and fluent, shelves filled and protected shareholders’ equity. TSN exported food products to foreign nations suffering in the throes of the pandemic.

Healthy Finances

The company sustained and emerged financially healthy. This week, Tyson reported second-quarter Non-GAAP earnings per share of $2.29 beating estimates by almost half a dollar. Tyson ended 2021 with about $8.28 billion in debt; that is a decline of 23.26% from 2020.

It holds over $5 billion in cash and investments. That plus the ~$33 billion market cap reassures lenders the company is on solid footing. The debt is well-covered by cash flow and interest payments by EBIT. The debt has been reduced over the past five years.

Tyson's revenue is up 16.1% year-over-year. Demand is holding strong. Droughts are slicing into animal feed production with costs rising 35% to 55%. Diseases in chickens, beef, and hogs are limiting the supply. Sanctions on Russia and the war in Ukraine are impacting food costs. COVID-19 continues to thwart China’s food supply recovery. Meatpacking and China’s hog market are hit particularly hard. Farm.com reports China’s imports of chicken meat (excluding paws) are projected to reach 800,000 metric tons in 2022, an increase of two percent over 2021.”

Product price increases have not hurt. People are willing to pay higher prices and producer margins are stronger. According to the company, sales of beef increased by 23.8%, sales of pork increased by 10.8%, chicken by 14.4%, and prepared foods by 15.9% compared to the same period in 2021. Though sales might be flat down the road, management is “targeting $1 billion in productivity savings by the end of 2024 and more than $400 million in fiscal 2022.” Cash and equivalents reached $3.4 billion by the end of the second quarter.

Source: Infrontanalytics, TSN

Pricing and Sales Challenges

Exports expectations are strong but competition from Brazil and other countries is increasing as COVID-19 cases decrease. Poultry sales are expected to outstrip pork and red meat sales by 2027. “Chicken remains a top priority,” for Tyson management, the CEO stated. Meantime, Tyson pork exports to China and Southeast Asia surged in 2021.

Hedge funds and insiders took some profits over the last quarter, as the share price moved into the high $80s and $90s. These trades are not affecting the share price.

Another challenge is the growing market for plant-based “meat” hybrids. Tyson is addressing the trend. A Tyson subsidiary arriving late in the trend and a small player specializing in plant-based “meat” offerings from nuggets to hamburgers are kicking off the alt-meat business in Asia.

Takeaway

TSN is a moderate growth company, and I believe investors undervalue it. I forecast the stock to move higher at a moderate pace. Tyson is consistently profitable, paying a nice dividend, and the share price appears at low risk for any precipitous drop.

The weakest factors in Tyson Foods' financial picture are its valuation and growth potential. Profitability, momentum, and revisions all get an A+. Retail value investors ought to be looking for companies that are profitable and have manageable debt in these uncertain economic times.

Tyson Foods operates at the core of an industry critical to national political, social, and economic stability. 96% of its 120 thousand employees are vaccinated. Supply chain and inflation worries are in the rear-view mirror. Tyson’s share price is not volatile. I believe TSN is a good long-term investment for retail value investors.