Tyson Foods shares up 68% this year

Investors of Tyson Foods have plenty to smile about as the meat giant’s shares have recorded stellar growth this year of 68.5% behind solid revenue growth and a flush balance sheet offsetting lackluster earnings for fiscal 2019.

Despite recent operational challenges, Tyson Foods’ stock has shown resilience. Shares of Tyson Foods (NYSE: TSN) peaked at $93 per share in early September following a solid third-quarter report, but then tumbled to the $81 level on Sept. 4 when Tyson executives lowered earnings guidance for the fourth quarter by $220 million because of short-term challenges. Shares have inched back up in the past month or so but found some resistance at $90 per share.

One Wall Street analyst recently put out a bullish report on Tyson Foods saying the company is poised to meet its guidance of high single-digit earnings growth in 2020. The short-term challenges are improving, according to Kenneth Zaslow of BMO Capital Markets, who said the company should continue to rebound from 2019’s performance level by 2021.

Zaslow has reiterated his “outperform” outlook for Tyson in the coming two years citing “earnings power far outweighs short-term operational missteps.”

He said Tyson Foods execs excluded any potential financial upside from a resolution of the African Swine Fever (ASF) outbreak, resolution of the U.S.-China trade dispute, and insurance proceeds that will help to cover the damage from the beef processing plant fire in Kansas. Tyson said this week that the plant will begin accepting cattle for slaughter the first week of December and will return to full operation by Jan. 3. Losses associated with the plant shutdown resulted in a $31 million related charge in the fourth quarter. Tyson said additional costs would be charged in early 2020.

While Zaslow sees future earnings potential, he lowered his adjusted fiscal 2020 earnings outlooks to $6.52 per share, down 7 cents. He said by fiscal 2021, Tyson should earn $7.52 per share, an annual growth rate of 15%.

He cited four reasons for his optimistic outlook. He said the resolution of the ASF trade issues is likely to elevate Tyson’s chicken margins. He said increased chicken promotions by quick-service restaurants should also help Tyson’s U.S. chicken results starting in early 2020. Ample cattle supplies and higher cattle exports should drive higher beef margins for Tyson Foods. He said as Tyson continues to balance hog packing capacity with hog supplies and higher pork exports, the company should be able to recover pork packer margins that have been wrecked from ASF issues.

Another important metric Zaslow cited for Tyson Foods is the company’s strong cash flow. He predicts at least $1 billion of cash flow generation in 2020 and $2 billion in fiscal 2021.

Tyson Foods CEO Noel White said last week that the company will continue to expand with new products in retail frozen and fresh and in foodservice in 2020.

“Alternative protein projections remain strong, and we’re also well-positioned to lead in this growing space. Last year’s sale of our non-protein foodservice businesses improved our product mix and pricing while reducing sales volume for the Prepared Foods segment. Operating income for the year was relatively flat as strong demand and the improved mix was offset by increased raw material and operating costs,” White said.

“Looking ahead to 2020 for Prepared Foods, we expect continued growth in retail consumption as well as foodservice channels like convenience, K-12 and noncommercial. As African swine fever reduces global pork supplies, we could see increased raw material costs, but keep in mind, a large portion of our business is price list and direct pass-through pricing. This allows us to react quickly to recover costs when we see sustained raw material price movement,” he said.

White said Tyson has a diverse portfolio and it benefits from strong brands and a willingness to enter categories and bridge partnerships with customers.

“We’re optimistic about fiscal 2020 … We have opportunities to not only grow but to thrive while creating long-term shareholder value,” White said during the earnings call with analysts last Tuesday (Nov. 12).

Tyson Foods shares traded at $90.14 at mid-day on Tuesday (Nov. 19), up 16 cents on normal volume. Given Tyson Foods growing international footprint, the stock has seen only incremental moves on recent news of China opening its market to U.S. chicken. Tyson already operates a chicken business in China as well as Thailand.

Tyson Foods trades at about 16.3 times fiscal 2020 earnings which are deemed a value by industry standards. Nine of 14 analysts rate Tyson Foods shares a buy, four analysts are neutral on the stock and one analyst has a “sell” rating on the stock, according to the listing on Yahoo! Finance.

Analysts have largely built their brighter expectations on improved operational efficiencies within Tyson’s U.S. chicken segment and growing prepared food segment margins. Wall Street analysts that cover Tyson Foods have a consensus target price of $97.92. The price target is the price an analyst believes the stock will achieve during their investment time horizon, which for most firms is 12 months.