Over the last month or so, the market has struggled to establish a clear direction. Increasing COVID cases across the country are finally starting to cause concern, especially heading into the colder months of the year, while the political arena has only gotten more divisive and contentious in the weeks ahead of the presidential election. While everybody seems to agree a second wave of stimulus is needed, especially to help small businesses all over the country get through the winter, there has been no progress on any kind of deal – nor any expected until after the election is finalized. With earnings reports coming in a bit mixed, and unemployment still showing more than 8.3 Americans looking for work, investors also seem to be having to come to terms with the fact they’ve pushed market valuations to unrealistic levels given the current economic climate.
As of this writing the VIX, the CBOE Volatility Index, which measures the market’s expectation for volatility – also called the “fear index” by a lot of investors – based on the S&P 500 was spiking to levels above 30, which it hasn’t seen in nearly two months. That is a good indication of the current emotional makeup of the market right now; uncertainty is something that tends to increase broad market volatility. In and of itself, that isn’t automatically negative, but it can act to put a top on near-term upside. In this kind of environment, it’s smart to start thinking about ways you can keep your money working for you in defensively-oriented areas of the economy, and as always, to keep the size of new positions you might work with as conservative and manageable as possible.
Tyson Foods Inc. (TSN), is a stock I’ve followed for some time. 2020 hasn’t been 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 $60; but from that point the stock has been hovering in a mostly sideways trading range. While other stocks in what I consider to be an industry (Food Products) that is nicely positioned as a defensive place for conservative investors have followed the market’s broader trend higher, TSN has been under pressure from negative press about factory conditions and labor unrest. The company has invested heavily to address safety concerns, and that is something that earlier this year appeared to act as a drag on the bottom line; but the company’s most recent earnings report suggests not only that it continues to navigate near-term, coronavirus-driven headwinds, but that it has benefited from increases in protein demand in the U.S. and overseas. In the last month, the stock has also faded about -4% below the range levels it held through most of the summer, while forming what looks like a new consolidation base. All told, I think that means that TSN might have finally reached a point under current market conditions where its value proposition is simply too good to pass up.
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 $21.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by about -4.76%, while sales drp[[ed -7.93%. In the last quarter, earnings improved, increasing 81.82% while sales were -7.95% lower. TSN operates with a modest, but improving margin profile; in the last twelve months, Net Income was 4.26% of Revenues and strengthened to 5.26% in the last quarter.
Free Cash Flow: TSN’s Free Cash Flow is healthy and getting stronger, at a little less than $2.5 billion. That number has increased from about $1.6 billion in the last quarter. Its current level translates to a useful Free Cash Flow yield of about 11.43%.
Debt to Equity: TSN has a debt/equity ratio of .75, which is pretty conservative. Cash and liquid assets increased from about $170 million in June of 2018 to about $437 million in the quarter prior, but improved dramatically in the last quarter to $1.36 billion. TSN carries about $11.2 billion in long-term debt, which increased from about $9.7 billion two quarters ago. 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 pays an annual dividend of $1.68 per share, which at its current price translates to a dividend yield of 2.68%. 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 has maintained the higher dividend throughout the year, 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 this year.
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 $83 per share. That means the stock is nicely undervalued, with 42% 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 downward trend beginning in January until mid-March. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s rally into mid-April put the stock right at the 38.2% Fibonacci retracement line, which is sitting a little above $62 per share. The stock saw a temporary, bullish push to the 50% line in early June, but then fell back to range support around $55 in early July. Through most of August and into September, the stock set a trading range with support at around $62 and resistance a little above $66. In the latter part of September, the stock dropped below the 38.2% retracement line and found a new low at around $56.50, with top-line resistance now around $60. At the moment, the stock is bouncing off of support and is about midway to resistance. A push above $60 could give the stock room to rally to about $64 where the 200-day moving average should act as a next resistance. A drop below $56.50 could see the stock’s next support somewhere around $53 based on pivot lows in April, May and July.
Near-term Keys: TSN’s value proposition is much better now than it was as recently as a month ago, 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 break above $60 as a signal to buy the stock or work with call options, with a useful profit targets at $64. A drop below $56.50 could offer a signal to consider shorting the stock or buying put options, with $53 as a quick-hit profit target, and additional downside below $50 if bearish momentum continues.