With the S&P 500 lower to the tune of 9% just since last month's high and down 17% year to date, it's not a stretch to say things have been lousy for investors of late. They've been even worse for owners of Tyson Foods (TSN 1.83%). Shares of the chicken and pork producer are off more than 26% from their April peak, reaching a new 52-week low earlier this month. Blame a combination of supply chain woes, logistics headaches, and market-wide malaise.
Forward-thinking investors eying this stock as a prospective purchase aren't wrong, though. Indeed, taking that step here in spite of the bearish rhetoric could be a brilliant move. Here's why.
Many, many moving parts
Consumers are buying less beef due its soaring cost, opting for more affordable chicken and pork (although the prices for all three proteins are well up from year-ago levels). The shift plays right into Tyson's hand, in that it sells all three.
But the company wasn't entirely ready for the depth of the shift that's taken shape. Tyson's fiscal third-quarter earnings for the period ended in early July fell short of estimates despite the revenue beat, suggesting the company is facing inflation problems of its own. To this end, volume growth was essentially nil for the recently ended quarter. Tyson also cautioned shareholders that demand for chicken and other meats remains greater than its capacity to provide it, although it is ramping up its production capacity.
End result? The market's seeing Tyson's glass as half empty rather than half full, and understandably so.
Largely lost in all the noise behind the stock's big pullback, however, is that none of this dynamic is new. The company's been on the wrong end of this supply and demand cycle many times, and each time it has come out of the lull at least as strong as it went into it.
Nothing out of the ordinary
Tyson's last similar bout with supply and pricing problems took shape in 2018, when the company was trying to find a profitable balance in the wake of a trade war that made it difficult for Tyson to sell its goods overseas. The company eventually shrugged off a similar problem in 2014, when meat prices were too high to sustain. And although it's way back in time, some investors may recall Tyson Foods bumped into pricing and demand turbulence back in 2009.
In every single instance, the price disruption was eventually answered with a return to protein prices' longer-term, relatively shallow, uptrend.
US Producer Price Index: Farm Products: Slaughter Hogs data by YCharts
The explanation isn't a particularly complicated one. People have to eat, and food companies like to make money. The meat business scales well, but it also scales slowly. There are periods of price and supply disruption, but eventually, a sustainable balance among price, supply, and demand is restored.
This go-around isn't any different from the previous ones for investors who can remain patient.
Positioning for sustainable profitability
In the meantime, Tyson is answering the call. While it warned investors it wasn't able to meet all of the current demand for prepared foods in general and chicken in particular, just last month the company announced a $200 million investment in an existing beef processing plant in Amarillo, Texas, that will add another 143,000 square feet of production space.
That follows an early August report of a $180 million investment in a production facility in Caseyville, Illinois. In July, Tyson entered into partnership with Saudi Arabia's Tanmiah Food Company, giving it an equity stake in a couple of different poultry operations that will ultimately improve its access to chicken, and in May the company confirmed $90 million investment in a chicken processing facility in Mississippi.
These are all parts of plans laid out at in May at BMO Capital Markets' Global Farm to Market Conference. These plans call for up to $1.8 billion worth of investments in capacity, and should subsequently improve the company's output on the order of 30% to 40%, depending on the protein in question.
The catch? It's going to take a couple of years for these investments to start paying off. If history is any indication, though, the effort to stabilize meat prices at sustainable, profitable levels will work.
Down for all the wrong reasons
Stocks don't always rally simply because an underlying company's future looks bright. If there was ever an exception to this hangup, though, Tyson Foods is arguably it.
As of the most recent look, shares are trading at just above eight times this year's likely earnings. They're also priced less than 10 times next year's per-share earnings projection of $7.59, which may or may not fully reflect the volume growth that comes from lower beef, chicken, and pork prices.
The stock's also trading more than 20% below analysts' consensus price target of $94.58, according to The Wall Street Journal, further solidifying the odds of a rebound.
It's not necessarily your very best bet right now, but if your portfolio needs a bit more long-term exposure to consumer goods names, Tyson's pullback this year certainly makes it a healthy option. The market's simply overreacting to short-term headlines, ignoring trends that return prices to their bullish mean.
