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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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But readers should note that the top four US beef producers have 75% market share; the top four in pork have 57% market share; and the top five in chicken have 63% market share. So there is at least some mild pricing power to be developed in the next few years instead of a totally competitive market model.

Getting to my valuation is all about what could be a longer period of no earnings momentum to catalyze the stock, even with a very cheap valuation.

One of the first things I learned as a young analyst is that the US corn crop comes in well five out of six times, i.e., do not bet against it. However, there have been three bad corn crops in a row now. Rain has not been great since July; unless there is a lot of snow this winter, there will be low soil moisture, even when the corn crop is planted in May. However, there have been three bad corn crops, a statistical outlier given the norm of five out of every six years being good for crops.

It would be extremely unlikely there would be a fourth year, akin to the Dust Bowl years of the 1930s, but it can't be discounted. So a good corn crop is not likely to be discounted in the stock until there is better weather news. The situation for corn is somewhat the same for US soybeans and dryness in US pasture land. A bumper crop in the southern hemisphere would be unlikely to change things much.

Also working against the stock in the shorter term is the fear that the economically stressed US consumer will not be able to pay for higher-end "center of plate proteins," such as meat, poultry, and seafood. Chicken prices were already at historically high levels before the towel was thrown in on the US corn crop. Pork and beef will both get more expensive. Now I have seen many consumer analysts say that this or that product will not have much demand elasticity because consumers are so attached to it, only to find out otherwise. But it is a safe bet that US consumers are not turning into vegans anytime soon, and that chicken demand will not be particularly elastic. (Pork demand is also not expected to be particularly elastic.)

Another thing working against the stock is the tendency of the chicken industry to over-produce and not adjust production to rising costs fast enough. Egg sets may not decrease fast enough, and Tyson said that it is not cutting them now. This may be a problem when it comes to achieving normal earnings. Producers may end up betting too heavily on the lack of demand elasticity noted earlier. Heifers are being slaughtered so the beef profitability will be pushed out, with normal profitability here possibly not coming until 2015.

So analysts' average earnings per share for FY September 2013 is at $1.55 (down from a $1.77 FY12 estimate), which looks very optimistic. I would not be surprised to see something below $1.00 for FY13 (the lowest sell-side estimate is $1.20).

If you're trying to outperform the market, big upside that remains unrealized can make your relative performance look bad. But dead money is my favorite risk, easier to take than other risks out there that affect other stocks in other industries, at least in this environment.
Long Tyson
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