Getting ready to close out a year that most of us are probably anxious to put behind us and look ahead to the future has been a common theme lately on social media. I think it’s certainly true that exhaustion about COVID and everything associated with it has most people hoping for better things in 2021. That general theme applies not only to the worldwide health crisis but even to politics, which is a pretty common theme in the U.S. when the government is getting set to transition from one presidential administration to the next.
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, and are holding just a little below that mark moving into the extended holiday weekend. Whether that hope proves true remains an open question; while unemployment numbers have dropped throughout the year after spiking at the outset of the pandemic, big new waves of infections, and increasing COVID-related fatalities across the globe have many health experts and economists continue to press the need to be cautious. A second stimulus and federal funding bill approved this week by Congress found surprise opposition from the White House, threatening to shut the government down and cut off jobless benefits that still cover more than 12 million out-of-work Americans. The President doesn’t have to formally veto the bill, since a “pocket veto” – where he simply lets it sit on his desk through the 10-day window required by federal statute for a formal signature or veto – would cause sufficient delay to effectively kill the bill before a new session of Congress is convened on January 3. While the political posturing is short-term in nature, the delay could create a ripple effect that could extend will into next year.
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, even if economic pressures remain in place or even increase. One area that has remained resilient throughout the 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 many other industries in 2020, and a number of cases even managed to improve. The 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 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 $65. The stock attempted a brief rally in November that peaked at around $70 early in December, but it has faded back again from that point and appears to be consolidating in the mid-$60 range right now. 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 reports suggest 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. The stock’s fair value target has also increased measurably in the last quarter, 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 $23.6 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by about 49.5%, while sales rose 5.29%. In the last quarter, earnings increased a little over 29% while sales were 14.35% higher. TSN operates with a modest, but improving margin profile; in the last twelve months, Net Income was 4.96% of Revenues and strengthened to 6.04% in the last quarter.
Free Cash Flow: TSN’s Free Cash Flow is healthy and getting stronger, at $2.675 billion. That number has increased from about $1.6 billion at the beginning of the year, and a little under $2.5 billion in the last quarter. Its current level translates to a useful Free Cash Flow yield of 11.73%.
Debt to Equity: TSN has a debt/equity ratio of .69, which is pretty conservative. Cash and liquid assets increased from about $437 million at the end of 2019 to $1.42 billion in the last quarter. TSN carries about $10.7 billion in long-term debt, which declined from about $11.2 billion in the quarter prior. 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 after the latest earnings report, which at its current price translates to a dividend yield of 2.76%. 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 has now 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 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 $92.50 per share. That means the stock is nicely undervalued, with 43% 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. At the beginning of November, the stock pushed above the 38.2% retracement line and found a new peak 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 $70, a little above the 50% retracement line. The stock has since dropped back to the 38.2% line, using $62 as what looks like a good support level to move higher, with near-term upside to about $70. A drop below $62 could see downside into the $58 – $57 range before finding next support.
Near-term Keys: TSN’s value proposition is much better now than it was in the last quarter, 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 political uncertainty and 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 continued move off of support at $62 as a signal to buy the stock or work with call options, with a useful profit target at about $70. A drop below $62 could offer a signal to consider shorting the stock or buying put options, with $58 to $57 as a useful profit target on a bearish trade.