Summary
- Inflation has been a headwind, and Tyson Foods' adjusted EPS declined 70% year over year in the first quarter of fiscal 2023.
- A recession could decrease earnings given the company's pricing power isn't that strong.
- Tyson Foods has a fairly low forward P/E valuation.
- I don't know what will happen in the short term as there are a lot of uncertain factors that could affect profitability and the stock.
- In the long term, however, I am bullish on Tyson Foods, and I think the stock price could get to $90-$100 per share in five years as inflation normalizes and more people can afford to buy meat.
Tyson Foods, Inc. ( TSN ) is a one of the largest food companies in the world and a recognized leader in protein with a broad portfolio of products and brands including Tyson, Jimmy Dean, Hillshire Farm and more.
Shares of Tyson Foods have declined from close to $98 in early February 2022 to $62.36 as of February 23.
Arguably the main reason for the decline is lower earnings.
For the company's first quarter of fiscal 2023, which is the quarter ended December 31, 2022, adjusted EPS declined 70% year over year to $0.85 from $2.87 even though sales rose 2.5% year over year.
The company said :
We faced some challenges in the first quarter. Market dynamics and some operational inefficiencies impacted our profitability. We expect to improve our performance through the back half of fiscal 2023 and into the future, as we strive to execute with excellence and work to become best in class in our industry.
One market dynamic would be inflation which has decreased many consumers' buying power.
For first quarter fiscal year 2023, Tyson Foods' increase in revenue and decrease in EPS indicates the company's brands don't have that much pricing power.
Given inflation, if a company's brand is strong enough, it should be able to raise prices to have similar profit margins assuming the company doesn't have too many operational inefficiencies. Nevertheless it seems that when prices go higher, consumers aren't willing to pay too much more for Tyson Foods' brands. As a result, Tyson Foods doesn't raise its prices as much as inflation in some instances.
Given the weaker pricing power, Tyson Foods' profits could weaken even further if there is a recession as more consumers might buy cheaper alternatives if there is more economic uncertainty.
As 2022 indicates, Tyson Foods isn't really a great defensive stock if certain macroeconomic events occur.
Inflation is Decreasing
Fortunately, inflation is decreasing and recessions don't usually last for over 2 years.
Given the interest rate increases, the Federal Reserve thinks inflation will decrease this year and that it could potentially win the fight against it eventually. How long it takes is uncertain, however.
Although there is a probability of a recession in the next year, the average recession since World War II has lasted for around 10 months . The next recession could be shorter or longer given different circumstances. If inflation is higher, it would be harder for the government to use monetary policy to exit out of a recession.
Although Tyson Foods earnings per share could decrease further if there is a recession, the company has a pretty decent balance sheet with a net debt/adjusted EBITDA of 1.6x for twelve months ended December 31, 2022. The company also ended 2022 with liquidity of $2.9 billion. The company is also targeting $300-$400 million in productivity gains in FY23.
Having a decent balance sheet and having profits can allow the company to buy back stock if it doesn't spend too much on capital expenditures.
Indeed that's what Tyson Foods management has been doing.
In the first quarter of fiscal year 2023, the company bought back 4.9 million shares for $313 million .
For the three months ended December 31, 2022, the company had net income attributable to Tyson Foods of $316 million.
To me, the fact that management used basically almost all of the net income in the quarter to buy back stock indicates that management thinks the stock could be undervalued. This rate isn't sustainable because the company also pays dividends of $1.92 per share per year.
Valuation
In terms of valuation, the stock is trading for a pretty low valuation in terms of earnings estimates.
According to Seeking Alpha, analysts have an annual EPS estimate of $4.33 per share for the fiscal period ending September 2023. They also have an annual EPS estimate of $5.47 for the fiscal period ending September 2024.
With the estimates, Tyson Foods would have a forward P/E of 14.27 for the fiscal period ending September 2023, and a forward P/E of 11.28 for the fiscal period ending September 2024.
Given the company's historical P/E multiples of 13+ in 2021, I think there is upside in a few years, especially with the buybacks.
Given its fair net debt/adjusted EBITDA ratio, I think Tyson Foods could continue to buy back shares this year perhaps about the same as its net income minus the dividend cost.
Given the buybacks, the company's average diluted shares outstanding is decreasing.
Assuming that Tyson Foods earns $4 per share in the next year and it keeps its annual dividend of $1.92 per share the same, it would have $2.08 per share in profit left over. If management used all of that for share repurchases, assuming a share outstanding of 358 million, that would mean $745 million in annual buybacks.
With a market capitalization of $21.93 billion, management could reduce the shares outstanding by around 3.4% a year assuming they don't issue more shares given the current stock price.
The actual earnings estimate for the next year is higher than $4 but we take a conservative earnings estimate instead.
The Long Term
Tyson Foods has, of course, missed multiple earnings estimates in the past so earnings estimates in the future might not be reliable.
Although there is a lot of uncertainty in the near term, there is still a compelling case for Tyson Foods in the long term.
The world population is increasing and average incomes are increasing. As the world gets wealthier, more people will want to consume meat and more people can afford to buy Tyson Foods' brands.
If the company does a good job in branding, demand in the long term will still rise.
Risks
If there is a recession, demand could decrease and Tyson Foods' profits could decline.
Inflation might not decrease as much as expected and the company might have weaker profits as a result.
Inflation could normalize but profits might not increase.
Bird flu could negatively affect Tyson Foods' margins.
Tyson Foods could still have operational challenges that lower profitability.
Management might leverage the balance sheet too much in buybacks or they could make a bad acquisition.
Conclusion
I don't know what will happen in the short term as there are a lot of uncertain factors that could affect profitability and the stock.
In the long term, however, I am bullish on Tyson Foods and I think the stock price could get to $90-$100 per share in five years as inflation normalizes and more people can afford to buy meat.
There could be downside in the near term, however, as there could be a recession or as the company continues to face difficulty in terms of maintaining profit margins in high inflation.
For further details see:
Tyson Foods: Attractive Valuation Despite Inflation Headwinds