Tyson: We See Attractive Risk-Adjusted Upside at Current Share Prices

We see value in no-moat Tyson Foods’ TSN shares, now sitting in 5-star territory, well below our $85 fair value estimate. We think the current price implies that challenging operating conditions will linger. Meat markets are cyclical, and a return to a more normal backdrop would justify our valuation. Further, we don’t see any structural changes that would warrant a permanent change to profitability.

As a part of this, trailing-12-months adjusted EBITDA has plunged by nearly half as of the end of March. Given it has failed to carve out an economic moat, with the bulk of its revenue from raw meat, Tyson is exposed to volatility in both input costs and the prices for its goods. And unfortunately, current market conditions have led to rampant cost inflation, pressure that has been exacerbated by sluggish demand for beef and pork that has weighed on its top-line performance. But we think the company’s strategic plans for its chicken segment, including improving fill rates, optimizing costs, and investing in automation, as well as its ongoing productivity program will bear fruit. As such, we forecast 2% sales growth on average annually the next five years, combined with a recovery in operating margins to 7.5% by 2027, in line with historical levels and an improvement from our 2023 estimate of 1.5%.

Shares have fallen by about one third over the past year, underperforming both the Morningstar Global Markets Index’s gain of 16% and other protein-centric peers like Pilgrim’s Pride and Hormel, which have lost 24% and 14%, respectively. But we don’t think this performance is justified and believe this is creating an interesting opportunity for investors looking to beef up their exposure to the meat aisle.