Tyson Foods (NYSE: TSN) is a food producer, and it’s presently enjoying fantastic operating leverage. As food prices rise, driven by inflation and worries of shortages, Tyson’s results are heating up. Food is highly inelastic as it’s essential to consume, so its demand isn’t affected by higher prices as much as other products. Accordingly, Tyson Foods’ can easily increase prices without offsetting sales volumes too much. Amid higher pricing during the first half of the year, the company should report record earnings this year.
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Nonetheless, I am neutral on the stock.
What Does Tyson Foods Do?
Tyson Foods has grown remarkably since its founding in 1935, as it is currently one of the biggest processors and marketers of chicken, beef, pork, and several other food-related products around the globe.
The company’s expansive operations contain breeding stock, feed production, processing, marketing, as well as transportation of chicken and affiliated specialty products, such as animal and pet food components.
Through its fully-owned subsidiary, Cobb-Vantress, Tyson is also one of the largest poultry breeding stock suppliers in the world. Besides its food-related activities, Tyson unlocks additional value by selling specialty by-products such as hides as well.
How the Current Environment Benefits TSN Stock
There are currently major tailwinds as a result of the present market setup, which are favorable to Tyson’s performance. One of the most pressing issues upsetting the world nowadays is the prospect of food shortages during the winter, driven by the ongoing invasion of Ukraine.
Since both Ukraine and Russia are prominent suppliers of commodities that are critical to our eating habits, such as grain and oilseeds, the world might not get the overall supply it needs this year. Ukraine is incapable of producing crops at optimal capacity, while its ports could be blocked by Russia. Also, Russia is being sanctioned, which could further affect Western countries in terms of the supply of adequate quantities of various agricultural supplies.
The consequences of this setup are already noticeable in the scarcity of some products in supermarkets and the elevated prices of numerous food products. As mentioned, however, this provides Tyson Foods with increased operating leverage, as its most recent results showcase.
In its Fiscal Q3 2022 results, Tyson recorded sales of $13.5 billion, an 8.2% increase from the prior-year period. It was also the best quarter in Tyson’s history in terms of total sales.
The rise in sales was powered primarily by higher pricing. The Pork, Chicken, and Prepared Foods segments saw their sales volumes decline by 1.7%, 2.1%, and 8.5%, respectively. However, higher prices of 20.1% in Chicken and 13.8% in Prepared Foods were more than enough to drive revenues higher. Beef reported stable metrics.
On a per-share basis, GAAP earnings equaled $2.07 compared to $2.05 in Q3 2021. While higher operating expenses squeezed bottom-line margins, the company’s buybacks helped the metric grow. Specifically, over the past four quarters, the company repurchased $710 million worth of stock.
In its earnings report, Tyson quoted the United States Department of Agriculture (USDA), whose indicators estimate that domestic protein production (beef, pork, chicken, and turkey) should be relatively flat year-over-year in 2022. According to this and its present pricing power, Tyson reiterated its expectations for the full year, estimating to deliver sales between $52 billion to $54 billion.
Based on these sales numbers and Tyson’s profit margin, I estimate that the company will post adjusted earnings per share of about $9.00 for the year. This is more or less in line with consensus estimates, whose average points towards adjusted earnings per share of around $8.85 for the full year. In any case, both of these levels should celebrate another year of record profits for the company.
Tyson’s Dividend Has Room to Grow
Tyson Foods exhibits a protracted track record of growing dividends to shareholders. Particularly, the company has increased its dividend annually for 10 successive years and has never trimmed it since 1997. Over the past five years, payouts have expanded at a CAGR (compound annual growth rate) of 17.2%. With four $0.46 quarterly dividends already declared, it’s quite likely that Tyson’s next dividend announcement will come with another increase attached.
Considering that the payout ratio remains quite low at just around 20% (assuming FY2022 EPS of $9.00), there is plenty of room for Tyson’s management to keep advancing the dividend at satisfactory rates, moving forward.
Is TSN Stock a Good Buy?
Turning to Wall Street, Tyson Foods has a Hold consensus rating based on two Buys and six Holds assigned in the past three months. At $92.43, the average Tyson Foods stock forecast implies 24.3% upside potential.
Conclusion: A Beneficiary of Current Times
Tyson Foods has been benefiting from the persistent inflationary environment, with the company’s substantial pricing power most definitely leading it to another year of record profits. TSN also appears to have more than enough room to continue growing the dividend at a rapid pace.
Assuming the company achieves earnings per share of $9.00 this year, Tyson shares are currently trading at a P/E of 8.4x. In my view, this is a very attractive multiple for such a quality company, even if earnings were to somewhat normalize from next year. In fact, it is quite likely that Tyson’s incredible pricing power will soften if worries over food deficiencies unwind.
