Risks when Buying Tyson Foods’ Shares

In this article, let's take a look at Tyson Foods, Inc. (TSN), a $17.68 billion market cap company, which is one of the world's largest suppliers of beef, chicken, pork and prepared foods.

Some Risk in the Future

The company finances the premium it paid for Hillshire Brands with debt. That debt worth because the deal is considered a perfect fit and the company plans to expand into the prepared foods business. The firm is searching for cost reductions; it plans to achieve over $500 million in cost synergies.

However, there are risks among the acquisition. If Tyson does not have the ability to integrate with Hillshire Brands, the premium paid increasingly would become meaningless. Further, a future scenario of weaker-than-expected demand or prices could impact revenues. Moreover, if those factors are combined with higher-than-expected feed costs, the firm´s margins can be severely affected.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 16.24x, trading at a discount compared to an average of 20.5x for the industry. To use another metric, its price-to-book ratio of 1.84x indicates a premium versus the industry average of 1.51x while the price-to-sales ratio of 0.43x is below the industry median of 0.86x. This last ratio is close to 10-year high of 0.44x.

The stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $27.365, which represents a 22.7% compound annual growth rate.

Fund's Positions

Ken Griffin's Citadel Investment Group disclosed a 10% increase in its exposure to the company´s stock. The fund owns 3.28 million shares of the company, which accounts for roughly 0.12% of its total portfolio, the value of the stake amounted to $139.7 million.

The largest shareholder is Michael Messner´s Seminole Capital (Investment Mgmt). The fund disclosed holding 4.17 million shares, up by 17% on the quarter, with the value of the stake amounting to $177.74 million.

Several gurus like First Eagle Investment, David Dreman, John Burbank and Jim Simons have initiated new positions in the stock with 701,500; 31,543; 5,107 and 73,300 shares, respectively.

Final Comment

As outlined in the article, Tyson has a significant exposure to commodity volatility. The firm´s growth through acquisitions is a centerpiece for expansion, and paying the debt and generating cost savings will

The PE relative valuation indicates that the stock is undervalued and might be a good “momentum” to take a long position in the stock, despite this is currently trading at a 52-week high.

Published on Sep 17, 2015
By Omar Venerio
Capital Markets, Derivatives and Financial Management Professor, Master in Finance and CFA candidate. I am an independent trader of stocks and options and passionate about the stock market.

Copyrighted 2020. Content published with author's permission.

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