We believe Tyson Foods stock (NYSE: TSN) looks like a good opportunity at the present time. Tyson Foods is the world’s second largest processor and marketer of chicken, beef, and pork. TSN trades at $67 currently and is, in fact, down 26% so far this year. It traded at a pre-Covid high of $78 in February and is still 14% below that level now. TSN stock has gained 17% from the low of $58 seen in March 2020, much less than the S&P 500 which is up more than 75% from its March bottom. TSN stock has underperformed the broader market with restaurants and retail chains remaining shut over the last couple of months, which meant very low demand for TSN’s products. Additionally, the recent spike in Covid-positive cases has limited the stock rise over recent months. However, now with the lockdowns being lifted and vaccine rollout leading to expectations of faster economic recovery, supply constraints are likely to ease and demand is to pick up, leading to higher volume sold. Also, the reopening of restaurants and retail chains is likely to boost revenue and margins in 2021. This could drive a healthy growth in TSN’s stock and is likely to take it to over $75, reflecting a potential upside of close to 20%. Our conclusion is based on our detailed comparative analysis Tyson Foods stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.
2020 Coronavirus Crisis
Timeline for 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- Since 3/24/2020: S&P 500 recovers 76% from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here is how TSN stock and the broader market performed during the 2007-08 crisis.
Timeline for 2007-08 Crisis
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- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
TSN vs S&P500 Performance Over 2007-08 Financial Crisis
TSN stock declined from levels of close to $18 in September 2007 (pre-crisis peak) to levels of little over $8 in March 2009 (as the markets bottomed out), implying TSN stock lost 53% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $12 in early 2010, rising by 46% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.
TSN Fundamentals Over Recent Years
Tyson Foods revenues increased from $38.3 billion in FY2017 to $43.2 billion in FY2020 (fiscal year end in September), due to higher volume sold. Along with higher revenues, margins also improved over recent years with EPS increasing from $4.53 in FY2016 to $5.86 in FY2020, driven by improvement in gross margin as volume and price per unit increased. In contrast, we see how close rival Beyond Meat’s revenues are expected to trend going forward.
Does TSN Have Sufficient Cash Cushion To Meets Its Obligations Through Coronavirus Crisis?
TSN’s total debt increased from $10.2 billion in FY2017 to $11.3 billion in FY2020, while its total cash increased almost 5x from $0.3 billion to $1.4 billion over the same period. At the same time, the company’s cash from operations also increased from $2.6 billion to $3.9 billion. Though debt has increased, the company’s increased cash balance and improving CFO generation capacity is likely to help TSN weather the current crisis.
Phases of Covid-19 Crisis
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. In view of only a modest rally since March 2020, we believe Tyson Foods, Inc stock has the potential for more gains once fears surrounding the Covid outbreak are put to rest. The gradual lifting of lockdowns, opening up of restaurants and retail chains, and easing of supply bottlenecks is likely to lead to improved top and bottom line in 2021.
While Tyson Foods stock may not have moved much, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Coca-Cola vs Merck shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.