The broad sense of hope that 2021 will set the stage for a broad recovery on multiple fronts seems to be a primary reason the broad indices pushed to a new set of all-time highs at the end of last week, with a total increase since January 1 of a little less than 6%. Indications that a number of economic indicators like unemployment continue to trend in a mostly positive direction have been given more fuel in the last week, with the passage of a third set of stimulus from Congress and signed by President Biden before last weekend. On the pandemic front, infections are also decreasing while vaccinations are also increasing, with many health experts and economists predicting that anybody who wants a vaccine will be able to get one by the start of summer.
While I want to be hopeful, I think there is more than enough remaining risk that a cautious, conservative, and defensive approach continues to be practical. That’s why I believe the smart way to keep your money for you in 2021 is to be very selective about looking for growth opportunities and to focus on stocks that continue to offer good value. One area that has remained resilient throughout the past year is the Food Products industry. Stocks in this industry have generally underperformed the rest of the market, but diving into the fundamentals of many of these companies show balance sheets that weathered the pandemic storm better than most other industries in 2020, and in a number of cases even managed to improve. The general underperformance of their stock prices means that as the fundamentals have strengthened, so too has the value proposition – and that is something that I think gives long-term, value-focused investors an edge going into the upcoming year.
Tyson Foods Inc. (TSN), is a stock I’ve followed for some time. 2020 wasn’t good for the stock; from a January peak at around $94, the stock began a downward slide that only accelerated in March as the entire stock market moved into bear market territory. TSN did find a bottom at around $44 in mid-March and then rebound with the market to around $65. The stock attempted a brief rally in November that peaked at around $70 early in December, but faded back again from that point to consolidate in the mid-$60 range at the start of the new year. From that point, however, the stock has rebounded strongly, pushing to a recent high at around $77 that, despite its healthy increase this year, is still about -18.5% below its pre-pandemic highs in early 2020.
The company has invested heavily over the past year to address safety concerns, and that is something that in the early stage of the health crisis acted as a drag on the bottom line; but the company’s most recent earnings reports suggest not only that it continues to navigate those short-term, coronavirus-driven headwinds, but that it has benefited from increases in protein demand in the U.S. and overseas. The stock’s fair value target has also increased measurably in the last couple of quarters, which is one of the biggest reasons I think TSN is a stock you should keep on your watchlist.
Fundamental and Value Profile
Tyson Foods, Inc. is a food company, which is engaged in offering chicken, beef and pork, as well as prepared foods. The Company offers food products under Tyson, Jimmy Dean, Hillshire Farm, Sara Lee, Ball Park, Wright, Aidells and State Fair brands. The Company operates through four segments: Chicken, Beef, Pork and Prepared Foods. It operates a vertically integrated chicken production process, which consists of breeding stock, contract growers, feed production, processing, further-processing, marketing and transportation of chicken and related allied products, including animal and pet food ingredients. Through its subsidiary, Cobb-Vantress, Inc. (Cobb), the Company is engaged in supplying poultry breeding stock across the world. It produces a range of fresh, frozen and refrigerated food products. Its products are marketed and sold by its sales staff to grocery retailers, grocery wholesalers, meat distributors, warehouse club stores and military commissaries, among others. TSN has a current market cap of $27.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by about 17%, while sales declined -3.28%. In the last quarter, earnings increased a little over 7% while sales were almost -9% lower. TSN operates with a modest margin profile; in the last twelve months, Net Income was 4.72% of Revenues, and which weakened slightly to 4.46% in the last quarter.
Free Cash Flow: TSN’s Free Cash Flow is healthy and getting stronger, at almost $3.2 billion. That number has increased from about $1.6 billion at the beginning of 2020, and $2.675 billion in the last quarter. Its current level translates to a useful Free Cash Flow yield of 11.46%.
Debt to Equity: TSN has a debt/equity ratio of .68, which is pretty conservative. Cash and liquid assets increased from about $437 million at the end of 2019 to $2.4 billion in the last quarter. TSN carries about $10.8 billion in long-term debt. For now, all indications are that there should be no problem servicing debt, however a decline in Net Income could erode liquidity fairly quickly given the high debt level.
Dividend: TSN increased its annual dividend from $1.68 per share to $1.78 per share two quarters ago, which at its current price translates to a dividend yield of 2.33%. TSN’s dividend has also increased from $1.20 per share in late 2018, and $1.52 at the end of 2019. The fact that management maintained the higher dividend throughout the year and also increased it despite the early challenges it had to deal with in adjusting to pandemic-driven operating conditions is noteworthy since so many other companies have been reducing or suspending their dividends.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $95.50 per share. That means that even with the stock’s sizable increase this year, it remains nicely undervalued, with 25% upside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line outlines the stock’s upward trend beginning in March of last year at around $42.50 and tracing to the current high at around $77. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. At the start of 2021, the stock used the 38.2% retracement line for strong support to begin its latest short-term trend within the long-term upward trend, driving to a new peak at around $77 as of this writing. The last pause in the stock’s rally was about a week ago, with a brief pivot in the $74 range that I’m using to mark current support. A drop below that point could see the stock fall all the way to about $69 before finding next support. The $3 distance between that support level and the stock’s current high at $77 also offers a simple price target if the stock can push above $77, putting the next expected resistance level at around $80.
Near-term Keys: TSN’s value proposition has been attractive for the last few months, and remains useful, with improving fundamentals that I think make it hard to ignore as a good long-term investment. I also think that global conditions, not merely related to coronavirus, but also to protein shortages around the world from other factors that pre-date the current pandemic, will generally continue to work in TSN’s favor. If you prefer to work with short-term term trading strategies, you could also use a push above $77 as a signal to buy the stock or work with call options, with a useful profit target at about $80. A drop below $74 could offer a signal to consider shorting the stock or buying put options, with $69 offering a useful profit target on a bearish trade.