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Why Tyson Foods Is a Buy

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This stock has little downside risk and a large upside potential.

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MINYANVILLE ORIGINAL) I believe that Tyson Foods (NYSE:TSN) is 30% undervalued and that, all things being equal, the stock price could gain back much of its undrevaluation by summer of 2013. At today's stock price low of $15.94 and the target price is $21-22 (analysis below). Tyson stock fell from near $21 in May to $15 in July as the market over-discounted the effect of the drought in the US corn belt, in my opinion.

Of course it could rise sooner on any of a variety of catalysts (including winter rain/snow that increases ground moisture at spring planting).

One thing that could push it lower would be higher feed pricing in turn would cause a margin squeeze since not all of the cost could be passed on to consumers who would then eat less beef, pork, and chicken, resulting in a decline in unit sales and volume.

Meanwhile the biggest "risk" is that money in the stock is now "dead money" waiting for better weather and planting conditions. if the overall market rallies in the interum Tyson could underperform relative to the market.

In investment analysis (as well as in agri-business), the assumption is that there will be a return to normal. Therefore, Tyson should be bought, based on its normalized earnings potential and on the assumption that normality will return.

Regarding normalized earnings per share (EPS), I used the low end of Tyson's estimate ranges of the normalizable operating income to sales ratios for beef (2.5%, 42% of total revenue), chicken (5%, 33% of revenue ), and pork (6%, 18% of revenue) which gave me a conservative estimate of $1.93 per share. (The high end would be $2.75, but that is pie in the sky for me.)

To value Tyson, I use a 3.8% risk free rate (present 30-year Treasury bond plus 1% to adjust for "QE whatever") and a 7% risk discount (not for real risks to the business enterprise's long term cash flows, but only for year-to-year earnings volatility, as other consumer staples are assigned nearer 4%). I believe that earnings can grow at a 4% five-year growth rate for five years after that, based on more protein consumption worldwide by developing countries. So the stock -- about $16 now -- should then be worth $22, for 35% appreciation.

Also, the current 7% risk discount assigned to the stock makes no sense, considering that other branded consumer staples companies are assigned a risk discount of around 4%. I believe that the increasing inroads being made by private labels on their branded competitors, combined with Tyson's growth in the developing world, will ultimately lead to a 6% discount for Tyson (worth $24.50 vs. $22.00) over maybe a five-year time horizon. That could help long-term holders, but I have not, and would not, predict that it will happen in the holding period required for this recommendation to work.
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Long Tyson
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