2023-06-05 12:32:17 ET
Summary
- Tyson Foods' stock price has dropped 44% from its 52-week high, offering a potential investment opportunity.
- Despite disappointing Q2 2023 results, the company has a strong history of profitability and growth.
- The current low valuation and dominant position in the industry make Tyson Foods an attractive long-term investment.
Tyson Foods (TSN) is becoming a hot item on my wish list as the company is now trading at a 12.1x TTM P/E after reporting disappointing fiscal Q2 2023 earnings back in May. With a share price of $51.34, Tyson Foods is down a whopping 44% from 52-week highs of $92.32. As a consumer staple company, revenues should be less cyclical in an economic recession than other more discretionary items, so should generally fare better than other industries in case of a recession. The current low valuation combined with the industry and dominant playing makes Tyson Foods look like a conservative investment opportunity in the current market.
However, even though the company sells staple goods, the meat commodity markets are cyclical in themselves as the Q2 results to be discussed later showed. This cyclicality opens up swings in business profits that can provide opportunities for investors with a long-term mind set. In my opinion, it looks like we are seeing one of those opportunities again!
Since I last wrote about Tyson Foods back in December 2020, the stock has been on a roller coaster and has given investors a total return of negative 14.2% if they held through the peaks. However, investors could have been well rewarded buying this consumer staples company at pessimistic valuations and selling when the valuation gets back to that appropriate consumer staples company level.
I started trimming my position in late 2021 and sold out completely in early Jan-Feb 2022 with my last sale taking place at $97.45 when it took a large leap higher on February 7, 2022. I then quickly initialed a core position again in the low $90's (still a 0.5% weight in my portfolio) but the company is now on my radar to take its weighting up to a 2.5%.
Latest Fiscal Q2 2023 Results
Tyson Foods released Q2 2023 results back on May 8th which, needless to say from the stock's price reaction, disappointed markets. As can be seen below from a slide in the Q2 investor presentation, Tyson Foods suffered both price and volume declines in the sales mix compared to the prior year with volumes down 2.9% and pricing down 5.4%. Company management commented on lower domestic demand and export markets driving weakness in both volumes and pricing.
This weakness in Q2 sales as well as inflation pressures on the cost side led to a diluted EPS loss of -$0.28 per share compared to EPS of $2.28 in the prior year quarter. Adding fuel to the pullback in Tyson Foods' shares, management also reduced guidance for the 2023 fiscal year with sales now forecasted to be 4.5% lower at the midpoint of the new $53 - 54 billion sales guidance compared to the prior $55 - 57 billion guidance.
Investors need to think long-term and look at bigger timelines such as the change in sales for the trailing 6-month period still being up 1.3% compared to the prior year period. Looking even longer term, with TTM sales of $53.6 billion Tyson Foods has grown revenue at a compound average growth rate of 6.9% annually since my first article on the company back in 2019 when they had sales of $42.8 billion. This annual sales growth is nicely above inflation and shows me that the company continues to expand beyond my rule of thumb 3% sales growth rate for a mature company. Let's dive into the historical performance of Tyson Foods a bit more to see through the cyclical revenue swings.
Profitable and Growing
Tyson Foods' scale and position in the industry have allowed it to achieve an average return on equity and return on invested capital of 15.5% and 10.1%, respectively, over the past decade. This level of profitability is well above my rule of thumb of 15% ROE and 9% ROIC, allowing me to be confident that, in my opinion, the company is able to maintain and continue to increase its intrinsic value over a business cycle.
Over this time period, dividend growth has been impressive with the dividend growing from $0.16/share in 2010 to $1.84 in the TTM period for an average compound growth rate around 114%. As mentioned previously, the dividend looks well supported by earnings given the 21% dividend payout ratio in the fiscal 2022 year. This low payout ratio leaves room for future dividend growth to continue at a pace ahead of revenue growth. Let's analyze the potential for increased dividends more through looking at the cash flows.
Cash Flow Analysis
Tyson Foods does a great job of generating cash and in recent years has been using this free cash flow to pay down debt as well as meaningfully increasing the dividend as mentioned earlier. To get an idea of the sustainability of dividends and share repurchases, we can take a look at what percent of cash flow from operations is available to be returned to shareholders after making the necessary capital expenditures.
As can be seen below, capital expenditures and acquisitions only used up on average 48% of cash flow from operations over the past decade. This leaves approximately 52% to be returned to investors in the form of dividends and share repurchases. With average cash flow from operations of $3.0 billion over the past five years and including the TTM period, this 52% would imply free cash flow to shareholders of $1.6 billion for around a 8.6% free cash flow yield at the current $18.3 billion market capitalization.
How About the Debt?
Financial leverage at Tyson Foods has also been on a bit of a roller coaster over the decade and sits at 1.88x in the latest quarter. Since I last wrote about Tyson December 2021, the company has reduced its financial leverage from 2.35x and looks able to take on more debt. This financial leverage still remains fairly conservative for a consumer staple company as evidenced by an interest coverage ratio of 7.06x in the TTM period. Tyson Foods' share count briefly shot higher in 2014 when the company purchased Hillshire for $8.6B but has since fallen back to lows seen before the acquisition. Debt increased around this time as well but financial leverage has since been reduced.
Price Ratios and Potential Returns
Tyson Foods' 12.1x TTM P/E ratio can also be expressed as an 8.3% earnings yield, but I also always like to examine the relationship between average ROE and price-to-book value in what I call the Investors' Adjusted ROE . It examines the average ROE over a business cycle and adjusts that ROE for the price investors are currently paying for the company's book value or equity per share. With Tyson Foods earning an average ROE of 15.5% since 2010 and shares currently trading at a price-to-book value of 0.93x when the price is $51.34, this would yield an investors' Adjusted ROE of 16.7% for an investors' equity at that purchase price, if history repeats itself. This is well above the 9% that I like to see, even before adding a 3% growth rate to represent the company growing alongside GDP, which could increase this potential total return up to 19.7%.
Takeaway for Investors
Tyson Foods is a highly profitable company providing an essential consumer good. The latest pullback after Q2 results offers investors the opportunity to buy this company at only 0.92x book value and potentially achieve some great 16.7% adjusted returns on their equity. I will look to continue adding this consumer staples company to my portfolio in at these valuations and in these market conditions.
For further details see:
Tyson Foods: A Staple In My Portfolio's Diet