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An Update on Tyson Foods: Sell It


The problems that led the stock to its $15 price in July have still not worked themselves out and could lead to some downward pressure on TSN.

Tyson Foods' (NYSE:TSN) stock is now efficiently valued. You should sell it unless you think you are deft enough to make a few more dollars selling it into price momentum from better technicals (Zack's just recommended it) or earnings momentum (Bank of America-Merrill Lynch analyst just upgraded TSN based on EPS estimates above long-term normalizable earnings, and BMO recommended it last week).

In October 12, 2012's buy recommendation, I wrote:

Tyson's 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. Higher feed pricing would cause a margin squeeze as not all of the cost could be passed on to consumers who would eat less beef, pork, and chicken, causing a decline in unit sales volume as well. That is a classic situation in agri-business. Just as classic, in investment analysis as well as in agri-business, is the assumption 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.

Using 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) gives me a conservative estimate of $1.93 per share (high end would be $2.75, but that is pie in the sky for me). To value TSN, I use a 3.8% risk-free rate (present 30-year Treasury bond plus 1% to adjust for "QE whatever"), 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 at $16 should then be worth $22, for 35% appreciation.

So, at a $23 price, we are there, and much sooner than I would have expected. As always, better lucky than smart.

But the problems that led to that $15 price in July have still not worked themselves out and could lead to some downward pressure on the stock. There has not been a really definitive decline in egg sets to allow for more profitability in chicken. Pork prices are not yet rising at retail, so the producer margin squeeze is still on. Though Cargill just closed a beef processing plant, the future of better beef profitability is still some ways off, likely 2015. While there seems to have been some precipitation in the plains and Midwest, the soil is likely still dry and will require more snow and/or heavy spring rains to get into normal planting condition for corn.

On the consumer side, the payroll tax increase will hurt consumers.
Long TSN.
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