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Here’s Why Tyson Foods (TSN) Should be in Your Portfolio Now

Zacks

Tyson Foods Inc. TSN hogged into limelight after it increased fiscal 2017 earnings guidance on Sep 28 and announced restructuring initiatives to strengthen its business to drive profits. The producer of chicken and poultry-based food products now expects fiscal 2017 bottom line to be in the range of $5.20-$5.30 per share, higher than its prior guidance of $4.95-$5.05.

Meanwhile, management expects favorable market conditions to continue to boost its financials in fiscal 2018 and projects earnings in the range of $5.70-$5.85, reflecting year-over-year growth of 8-13%. We believe continued focus on protein-rich brands and cost savings are driving the company’s profitability.

Evidently, shares of the company have been on a growth trajectory over the past three months. In the said time frame, the company’s shares have increased 18.9% compared with the industry’s rise of 14.2%. In fact, Tyson Foods’ shares have increased more than 8% since it raised earnings guidance. Tyson Foods also flaunts a VGM Score of A, which makes it a favorable investing option.


Let’s delve deeper and try to find out what’s taking this Zacks Rank #1 (Strong Buy) company higher.

Focus on High Protein Brands

Tyson Foods has been witnessing earnings growth courtesy of its improved sales performance. Notably, the company delivered higher sales volumes driven by increased demand for high protein foods. The acquisition of AdvancePierre acquisition, which was carried out in June, will enable the company to expand its fastest-growing portfolio of protein-packed brands and fresh prepared foods offerings.

While Tyson Foods is restructuring its portfolio to focus more on protein-rich brands, it’s exiting its non-core businesses (such as Sara Lee Frozen Bakery, Kettle and Van’s) to focus on protein-packed brands and drive sales.

Improved performance of the company’s Beef segment, backed by enhanced domestic demand, improved availability of cattle supply and higher exports, is also fueling sales. The company is also witnessing higher demand for chicken and pork, which is expected to drive Tyson Foods’ top line.

In fact, management expects sales growth across all of its business segments buoyed by rising consumption, easy availability of livestock and higher pricing.

Cost Savings

Meanwhile, cost savings is further boosting earnings momentum. Tyson Foods expects to generate cost savings of $200 million, $400 million, and $600 million in fiscal 2018, 2019, and 2020, respectively, through the AdvancePierre acquisition.

Also, the company is seeking to reinventing its supply-chain and procurement process and lowering overhead costs to boost savings. These cost savings are expected to improve the performance of Tyson Foods’ Chicken and Prepared Foods segments. Meanwhile, to streamline its management, the company would slash 450 jobs from corporate offices in Chicago, Springdale, and Cincinnati.

We expect that the company’s dedicated efforts toward inducing operational efficiency and reducing costs to improve margins and thereby profits in the forthcoming months.

Innovation Aids Portfolio Growth

Tyson Foods continuously innovates and adds products to an already rich food line up. As an increasing number of health-conscious U.S. consumers are focusing on nutritious breakfasts, Tyson Foods considers it a high potential category. Recent launches like Jimmy Dean Frittatas, Stuffed Hash Browns, Tyson Food Service Fully Cooked Drumsticks and Buffalo Chicken Crispitos are getting good response from consumers.

Valuation Multiples

If we look into the company’s P/E, EV/EBITDA and P/S multiples, we note that the company generally trades below its industry average.

Tyson Foods has a trailing P/E multiple of 14.8 and EV/EBITDA multiple of 10.0. This level actually compares pretty favorably with the industry at large, as the P/E multiple and EV/EBITDA multiple for the industry is pegged at 16.0 and 11.2, respectively. These are also trading below S&P 500 levels of 20.6 and 11.4, respectively. This indicates that the stock is relatively undervalued right now, compared to the industry and S&P 500.

Currently, Tyson Foods has a P/S ratio of 0.7. This is also lower than the industry average of 1.1 and S&P 500 average, which comes in at 3.2.

Valuation Multiple

Tyson Foods

Industry

S&P 500

P/E ratio (ttm)

14.8

16.0

20.6

P/S ratio

0.7

1.1

3.2

EV/EBITDA

10.0

11.2

11.4

Looking for More? Check These Consumer Staples Stocks

Investors interested in the same space may also consider some other top-ranked stocks such as Pilgrim's Pride Corporation PPC and Sanderson Farms, Inc. SAFM. Both sporting a Zacks Rank #1. You can see the complete list of today’s Zacks Rank #1 stocks here. While Pilgrim’s Pride has a VGM Score of B, Sanderson Farms hold a VGM Score of A.

Estee Lauder Companies, Inc EL flaunting a Zacks Rank #1 along with a VGM Score of C is also a viable pick.

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