Wall Street isn't thrilled about the short-term growth prospects for Tyson Foods (TSN -0.40%). While the meat producer is gaining market share and boosting customer satisfaction, poor economic trends in the industry have hurt sales and produced unusually weak earnings through the first half of fiscal 2023.
Tyson's shares have declined significantly as a result, potentially setting investors up for some excellent returns as the prices for beef, chicken, and pork start to rebound. Against that mixed backdrop, let's look at the stock as a potential buy right now.
The bad news
There wasn't a lot for investors to like about Tyson Foods' core business in the first half of the year. Sales of beef declined to $9.3 billion from $10 billion in that period, and pork sales fell, too. Overall revenue missed management's target in the most recent quarter, holding flat at $13 billion.
"The current macro backdrop is clearly tough," CEO Donnie King said in a conference call in May as he described several factors pressuring each of Tyson's three core protein products: beef, chicken, and pork.
The company's projection is bleak in this area, too, with the beef business likely to earn an adjusted profit margin of less than 1%, while modest losses of about 1% occur in both the chicken and the pork segments in 2023. It's no surprise, then, that the shares haven't participated in this year's rally.
Bright spots
There are good reasons to believe this is simply a temporary slump, though. Cost spikes, plus the pressure from usually high profit margins a year ago, are both transitory issues.
Tyson is also winning market share both on sales volumes and overall industry revenue, indicating no new competitive threat. And the company is boosting customer satisfaction scores as shoppers become more loyal to its brands.
Meanwhile, Tyson's branded foods portfolio, anchored by franchises like Tyson, Jimmy Dean, and Hillshire Farm, is seeing higher prices and rising volumes today. Management sees this division, along with the international segment, as key growth pillars over the next several years even though they are relatively small parts of the total sales picture today.
Looking ahead
The stock is priced as if the current profit challenges will continue long into the future. Investors need to pay just 0.3 times annual sales for the stock, down from recent highs of closer to 0.8 times revenue. A diversified and highly profitable branded foods business like PepsiCo, on the other hand, attracts a valuation of closer to 3 times revenue.
Tyson Foods has a long way to go before it can claim anything approaching Pepsi's level of international scale. For the foreseeable future, its earnings will largely depend on factors outside of its control like the supply-and-demand trends in beef, pork, and chicken.
Considering the likelihood of weak earnings at least into 2024, then, investors might want to wait before deciding to buy the stock. There are promising signs that Tyson can turn its business around over time, but it will likely be a few years before that recovery results in a sustainable uptick in sales and earnings.
