TSN’s -15% drop since January is interesting – is it enough to make the stock a good value?

The market’s rally to a new set of all-time highs is being taken as a sign that the economy is going to continue to grow throughout the rest of the year, which also means that for a many analysts and investors, the market is expected to maintain its long-term upward trend.

The news hasn’t been great for all stocks, however; I’ve noticed that a number of the stocks in the Food Products industry, for example have struggled while the market has been rallying. In fact, a number of those stocks have declined in value enough to mark legitimate corrections, or in a few cases, even their own respective bear markets.

Tyson Foods Inc. (TSN), in my opinion is one of the most interesting stocks in the industry. The stock’s strong fundamental profile translated to huge value at the beginning of 2019, as the stock nearly doubled in price from a downward trend low below $50 to the end of the year a little above $90 per share. It started the year strongly, pushing to a high just a little below $95 in the first two weeks of January before dropping back to about $84 before the stock’s earnings announcement last week. That report didn’t encourage investors, pushing the stock about $4 lower overnight and down to its current level a bit above $80 per share. Despite the disappointment, TSN maintains a solid set of fundamental metrics, with many analysts projecting solid revenue growth in 2020 for one of the largest protein producers in the world. Is it also a good value? Let’s dive in to find out.

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 $29.4 billion.

Earnings and Sales Growth: Over the last twelve months, earnings improved by 5%, while sales grew a little over 6%. In the last quarter, earnings increased by 37% while sales were flat, but slightly negative at -0.63%. TSN operates with a modest margin profile that appears to be strengthening; in the last twelve months, Net Income was 4.71% of Revenues and increased to 5.15% in the last quarter.

Free Cash Flow: TSN’ Free Cash Flow is generally healthy, at almost $1.3 billion. That number has decreased from about $1.9 billion in June of 2018. Its current level translates to a Free Cash Flow yield of about 4.88%.

Debt to Equity: TSN has a debt/equity ratio of .67, which is pretty conservative. Cash and liquid assets increased from about $170 million in June of 2018 to almost $500 million in the last quarter. The increase is a positive sign, but TSN also carries about $9.77 billion in long-term debt, which means that liquidity could be an issue in the event of a shortfall in company’s operating profits. For now, however for now their balance sheet indicates operating profits are more than sufficient to service their debt.

Dividend: TSN pays an annual dividend of $1.68 per share, which at its current price translates to a dividend yield of 1.8%. TSN’s dividend has also increased from $1.20 per share in late 2018.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TSN is $39.89 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.01. TSN’s historical average Price/Book ratio is 2.2, implying the stock is about 9.2% below its fair price. It is also nearly at par with its historical Price/Cash Flow ratio, which means that long-term upside could be limited for TSN, despite its current bearish momentum. The two ratios together put an actual bargain price in the $66 to $70 range.

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 January of 2019 to its peak in early September. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock hit a high point at the beginning of September at around $94, but dropped back sharply from that point to the 38.2% Fibonacci retracement line at around $77 before pushing back to the 52-week high in early January. From that point, the stock’s momentum has reversed strongly, and appears to be in position to accelerate after TSN’s latest earnings report. It is currently only about $3 away from nearest support around $77. A drop below that level could see the stock drop quickly to $72 (the 50% retracement line), or possibly even to $67 where the 61.8% retracement line sits if bearish momentum continues. On the other hand, if the stock can find support anywhere between its current price and $77, it could see near-term upside between $84.50 and $87.50 per share.

Near-term Keys: The stock’s current bearish momentum puts the near-term probability for TSN clearly on the bearish side. The best signal to look for would come from a drop below the stock’s current support at $77; if that happens, consider shorting the stock or working with put options, with an eye on $72 as a short-term exit target, or even $67 at the 61.8% retracement line if bearish momentum really picks up. If the stock does drop to between $66 and $70, that might be a good time to start considering the stock as a strong long-term value play, since TSN would be discounted about 20% below its historical Price/Book ratio at that point.