When facing an inflationary environment at the grocery store, people are making changes to what goes into their carts. Tyson Foods (TSN 0.61%), a leading meat producer, is feeling the effect.
Tyson's report for its fiscal second quarter, which ended on April 1, featured volume declines in the beef and prepared food segments, as well as price declines in beef and pork. Total revenue was essentially flat compared to the prior-year period, but profits collapsed. Operating income and adjusted earnings per share both crashed 84%.
Along with a weak Q2 showing, Tyson reduced its outlook for full-year sales. The company now expects to produce revenue between $53 billion and $54 billion, down from a previous range of $55 billion to $57 billion. Tyson also slashed its segment operating margin guidance for beef, pork, and chicken. The company now expects to roughly break even in each segment.
Cycles happen
Shares of Tyson tumbled Monday morning following the lackluster report, with the stock carving out a new 52-week low.
Outside of Tyson's prepared foods segment, the company's products are largely commodities. There's not much in the way of pricing power, so the average pricing in the beef, pork, and chicken segments is tied to supply and demand. In the current environment of cost inflation for Tyson and increasingly cautious consumers, that's a recipe for disaster.
It's important to remember that wide swings in Tyson's profitability are common. Here's a chart of the company's trailing-12-month operating margin since 1991.
TSN Operating Margin (TTM) data by YCharts
It's not uncommon for Tyson's margins to ebb and flow with the state of the meat market.
Is Tyson a beaten-down bargain?
Tyson's earnings definitely aren't consistent or predictable, and that makes valuing the company based on earnings a tricky proposition. We can look at two other metrics, the price-to-sales (P/S) ratio and the price-to-book-value (P/B) ratio, to get a sense of how cheap Tyson stock is historically.
Based on trailing sales, Tyson stock doesn't look particularly cheap or expensive.
TSN PS Ratio data by YCharts
Based on book value, Tyson stock is trading in the vicinity of its multi-decade low, excluding around the financial crisis. Tyson does have a lot of goodwill and other intangible assets on its balance sheet, so the P/B ratio may not be all that useful.
TSN Price to Book Value data by YCharts
What we can say from all of this is that Tyson stock probably isn't overpriced. It's also probably not a screaming bargain.
Tyson has been working to cut its costs, although the current environment has overwhelmed that effort. The company set a target of $1 billion in productivity savings relative to fiscal 2021, and the company hit that target as of the end of the second quarter. Even with those cost savings, Tyson posted a net loss in the second quarter.
Tyson has $543 million of cash on the balance sheet and another $1.75 billion in liquidity available in the form of a loan facility. The company expects to keep its total liquidity above $1 billion, but the balance sheet will certainly deteriorate as Tyson grapples with a tough market. The company already has $8.9 billion in total debt.
To me, it looks like it's too early to snap up shares of Tyson. The valuation isn't unreasonable, but it's not cheap either.
