- Tyson reported blowout earnings
- The shares have returned a total of 19.2% in the past 12 months
- Wall Street consensus 12-month price target implies 14% total return
- Market-implied outlook is bullish to early 2023, with moderate volatility
Tyson Foods (NYSE:TSN) gained 12% on Feb. 7 after reporting strong earnings for FY Q1, but have subsequently declined 10%. The shares have returned a total of 19.2% over the past 12 months, gaining more than the US equity market as a whole (14.7%), but considerably less than the Farm Products industry (31.2%, industry group defined by Morningstar).
The US-based producer of frozen and refrigerated foods needs to navigate the inflationary environment with care. Costs for agricultural inputs are rising and it must consider the trade-offs associated with increasing the prices of its products. Raising prices can offset higher commodity costs, but can also spur customers to seek cheaper alternatives.
As inflation has surged, the company has managed this balance masterfully, and far better than Wall Street analysts expected. The quarterly EPS has substantially beaten the consensus expected level for seven consecutive quarters.
Source: Investing.com
While the three- and five-year total returns have substantially lagged the S&P 500, not least because these are periods of predominantly low inflation, TSN’s total returns have beaten the broader US equity market over the past 10- and 15-year periods.
Source: Morningstar
Even with TSN’s substantial gains over the past year, the valuation is reasonable, with a P/E of 8.3 and dividend yield of 2.1%. The three-, five- and 10-year dividend growth rates are 10.3%, 19.3%, and 27.5% per year, respectively. The Gordon Growth Model supports an expected total return of 12.4% per year, using the three-year dividend growth rate as the expectation for ongoing growth. Tempering this fairly positive view, the consensus for EPS growth over the next 3-5 years is -2.1% per year.
While TSN is thriving in this inflationary period, the question is whether the current valuation already prices in the upside. Inflation will persist for some period of time, but will eventually decline. The analyst consensus for negative EPS growth reflects this assumption. In addition, the yield curve has briefly inverted in recent days. An inverted yield curve tends to signal market concerns about recession risk.
I last wrote about TSN on Oct. 5, 2021, almost six months ago, and upgraded my rating from neutral to bullish. At that time, the shares were up more than 20% YTD, considerably more than the S&P 500. Tyson had reported five consecutive quarters of substantially beating the consensus expected EPS. The smallest earnings beat was 20% above expectations (Q2 of FY 2021) and two quarters had earnings that exceeded expectations by more than 60% (Q3 of FY 2021 and Q4 of FY 2020). The Wall Street analyst consensus rating was bullish and the consensus 12-month price target was about 12.5% above the share price at that time. Along with the Wall Street analyst consensus outlook, I rely on a form of consensus outlook derived using options prices, the market-implied outlook. The market-implied outlook was bullish to early 2022 and neutral to the middle of the year.
Since I assigned the bullish rating on Oct. 5, TSN has returned a total of 15.7%, as compared with 6.4% for the S&P 500.
For readers who are unfamiliar with the market-implied outlook, a brief explanation is needed. The price of an option on a stock reflects the market’s consensus estimate of the probability that the stock price will rise above (call option) or fall below (put option) a specific level (the option strike price) between now and when the option expires. By analyzing the prices of put and call options at a range of strike prices, all with the same expiration date, it is possible to calculate a probabilistic price forecast that reconciles the options prices. This is the market-implied outlook and represents the implicit consensus view of buyers and sellers of options on the stock. For readers who want a deeper explanation than the previous link provides, I recommend this excellent (free) monograph from the CFA Institute.
With six months since my last analysis and the substantial share appreciation over this period, along with surging inflation, I have updated the market-implied outlook for the period to early 2023 and compared this with the current Wall Street consensus outlook.
Wall Street Analyst Consensus Outlook For TSN
E-Trade calculates the Wall Street consensus outlook by aggregating the views of seven ranked analysts who have published rating and price targets for TSN over the past 90 days. The consensus rating is neutral, although the consensus 12-month price target is 10.9% above the current share price, implying a 13% total return. The spread among the analyst price targets is fairly low, adding confidence in the consensus outlook.
Source: E-Trade
Investing.com calculates the Wall Street consensus outlook by aggregating the views of 12 analysts. The consensus rating is bullish and the consensus 12-month price target is 13.1% above the current share price.
Source: Investing.com
While E-Trade’s version of the consensus rating is neutral and Investing.com’s calculation of the consensus rating is bullish, the 12-month price targets are quite close (average value of 12%).
Market-Implied Outlooks For TSN
I have calculated the market-implied outlook for the 2.55-month period from now until June 17, 2022, and for the 9.64-month period from now until Jan. 20, 2023, using the prices of options that expire on each of these two dates.
The standard presentation of the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
Source: Author’s calculations using options quotes from E-Trade
The market-implied outlook to June 17, 2022, is generally symmetric, with the maximum probability outcome very close to 0% return, although the probabilities clearly favor large positive returns relative to negative returns of the same magnitude. Note, for example, that the probability of a +15% return is clearly higher than for a -15% return, for example. The annualized volatility calculated from this outlook is 29%, almost identical to the expected volatility calculated using June options in my last analysis.
To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).
Source: Author’s calculations using options quotes from E-Trade
This view shows that the probabilities of positive returns tend to be at or above the probabilities of negative returns of the same magnitude (the solid blue line is next to, or above, the dashed red line over almost the entire chart). This is a bullish outlook for TSN. The positive tilt in the market-implied outlook is more pronounced than in my analysis from September.
Theory suggests that the market-implied outlook is expected to have a negative bias because risk-averse investors tend to pay more than the fair value for downside protection (put options). While this bias cannot be directly measured, the expectation of a negative bias reinforces the bullish interpretation of this market-implied outlook.
The market-implied outlook for TSN for the 9.6-month period from now until Jan. 20, 2023, is bullish, consistent with the 2.55-month outlook. The expected volatility calculated from this outlook is 30%.
Source: Author’s calculations using options quotes from E-Trade
The market-implied outlooks for TSN to the middle of 2022 and to the start of 2023 are somewhat bullish, with expected volatility of 29%-30%. These outlooks are more bullish than in my previous analysis.
Summary
Tyson management has delivered a strong performance as inflation has risen, with EPS substantially exceeding the Wall Street consensus estimates. The shares have risen to reflect this performance.
At current levels, the consensus 12-month price targets imply 14% in total return over the next year. The Wall Street consensus rating for TSN differs between the two estimates I have looked at, with a neutral rating from E-Trade and a bullish rating from Investing.com.
The market-implied outlook is bullish to mid-year and to early 2023, with expected volatility close to 30%. As a rule of thumb for a buy, I want to see a 12-month expected return that is at least half the expected volatility. Using the Wall Street consensus for expected return, TSN falls slightly short.
With the bullish market-implied outlooks and TSN’s demonstrated ability to outperform analyst expectations in recent quarters, I am maintaining my bullish rating on Tyson Foods.