It's been a rough 12 months for Tyson Foods (TSN -0.70%) shareholders. The stock's down nearly 40% since last February's high, once again touching a new 52-week low just last week. Steep inflation and slumping demand are taking a slow but persistent toll on the meat giant's bottom line. Last quarter's earnings not only fell short of estimates, but fell in a big way compared to its income from the comparable period a year earlier. Investors are understandably spooked.
As Warren Buffett's sage investing advice instructs us, though, we should be greedy when others are fearful. Tyson is a buy here while it's down, as the foreseeable future looks much brighter than the recent past.
Tough times for Tyson Foods
CEO Donnie King pulled no punches during the company's recent Q1 earnings call, explaining that "we got hit in the mouth" during the period in question due to high operating and input costs that weren't able to be passed along to consumers. Sales were up a little over 2% year over year, but the 12% uptick in cost of sales cut Tyson's operating income to a third of where it was in the first fiscal quarter of the previous year.
TSN Revenue (TTM) data by YCharts
That's the downside of managing a low-margin business: Even relatively modest cost increases can have an outsize impact on earnings. Moreover, the Bureau of Labor Statistics' recently published inflation report indicates food prices continue to rise at an above-average pace.
It all bodes poorly for Tyson. As the old adage goes, however, nothing lasts forever.
Predictably cyclical
Veteran investors may well remember Tyson is the frequent centerpiece of heated meat-pricing discussions. Back in 2014, it was accused of being a "racket." Then in 2017, the Securities and Exchange Commission (SEC) investigated the company regarding price-fixing allegations. In 2019, it was the Department of Justice doing the digging.
Little ever came from these efforts, as Tyson's top and bottom lines often tumbled due to price drops and supply surges by the time any organization could make their point in the court of public opinion (or in an actual courtroom).
That's because the meat business isn't one that lends itself to foul play (even if at times it seems like it does). It's simply a highly cyclical one. Supplies expand when rising prices merit it, but that swell in supply is often too aggressive, driving prices uncomfortably lower again. Meat companies' pricing power and rising costs just aren't always in sync -- the former tends to lag the latter by a few months.
This cyclical nature of the meat business is one wise investors should understand and embrace while Tyson's stock's well down from its all-time high. The pricing dynamics currently proving so problematic for the meat company are poised to change again in a big way within the next several months.
Meat costs set to fall from here
Last year's inflationary pressures were extraordinary, ultimately stemming from the COVID-19 pandemic. But things are easing back toward normal now.
Case in point: The United States Department of Agriculture (USDA) believes 2023's beef production within the United States will improve by 50 million pounds to 26.5 billion. The increased output doesn't coincide with a major improvement in supply. Indeed, the USDA reports the nation ended last year with 4% fewer cattle than where it started 2022. More production should still help curb producers' costs, though.
Where Tyson can truly expect to see a significant degree of relief, however, is on the pork and chicken front. The USDA's data indicates a steep drop in hog prices over the course of the first four weeks of this year, en route to a forecast 7% decline in pork prices for the full year, again on slightly increased production from and for food packagers like Tyson. In the same vein, broiler chicken production should be up slightly in 2023, driving wholesale chicken prices down nearly 10% below last year's average, and roughly 25% below May's peak price.
They're just forecasts, of course, based only on information known right now, and subject to unexpected changes in the supply or demand of these various meats. But until there's a clear reason to assume these outlooks are off-base, investors would be wise to take them at face value.
Get in and buckle up
None of this is to suggest Tyson Foods shares are due for an immediate recovery. They might rebound, but this is a historically volatile and somewhat unpredictable stock in the short run. Buckle up if you're getting in.
Nonetheless, Tyson is a name that's also rewarded investors willing to step in at major lows. Look at the the chart above. The pullbacks from early 2020, all of 2018, and much of 2016 (just to name a few) felt nearly insurmountable at the time. In every case, though, shares recovered because the company found a way to bounce back.
Then again, that can't be too surprising. Sooner or later everybody's got to eat something, no matter what it costs to do so.
