Tyson Foods: Is It Time to Exit the Stock?

  • So far, Tyson Foods stock has risen about 75% this year.
  • The guidance cut could hurt the stock.

So far, Tyson Foods (TSN) stock is among the best performing consumer stocks this year. The stock has risen about 75% YTD (year-to-date) as of Tuesday, which is about 4.7x more than what the S&P 500’s return. The S&P 500 has risen 15.9% during the same period.

Part of the astounding growth has been due to increased demand for protein products across the globe. Management’s upbeat outlook also supported the stock. Due to the company’s diversified portfolio, management also expects to gain from the outbreak of African swine fever.

We expect Tyson Foods stock to continue to benefit from increased demand and its diversified portfolio. However, the recent guidance cut will likely hurt Tyson Foods stock. On September 3, the company announced that it’s experiencing short-term challenges that will impact its fourth-quarter profitability.

The company’s margins will likely take hit during the fourth quarter, which will pressure its bottom line. Management blamed operational issues, volatility in commodities, and a fire at the beef processing plant for the guidance cut.

Citing challenges in the fourth quarter, Tyson Foods expects to post an adjusted EPS of $5.30–$5.70 in fiscal 2019. Previously, management expected to post an adjusted EPS of $5.75–6.10. However, the company reaffirmed its fiscal 2020 outlook.

What’s next for Tyson Foods?

Barring near-term challenges, we expect the stock to benefit from favorable market conditions, including high demand. Also, Tyson Foods will likely gain from growth in the demand for alternative protein products. The company’s fiscal 2020 guidance remains positive. Tyson Foods expects to post revenues of $45 billion–$46 billion in fiscal 2020. The sales guidance implies growth of 6%–7% YoY (year-over-year) based on its forecasted sales of $43 billion in 2019.

Strong sales will likely cushion the profit margins in fiscal 2020. Analysts expected Tyson Foods to post an adjusted EPS of $6.93 in fiscal 2020, up about 17% YoY. The stock also looks attractive on the valuation front. Notably, the stock is trading at 13.5x its fiscal 2020 estimated EPS of $6.93, which seems attractive given the projected growth rate of 17% during that period.

While Tyson Foods’ prospects remain solid, near-term hiccups could hurt the stock. So far, the stock has already risen about 75% and is bound to take a hit from the lower EPS guidance. The stock was trading 5.8% lower in the pre-market session following the company’s revised guidance.

We see positive trends for Tyson Foods in fiscal 2020. However, the stock is due for a pullback. Investors could use the dips as an opportunity to invest in the stock.