Why Tyson Foods Is an Undervalued Stock

Tyson Foods Inc. (TSN, Financial) is a $23.53 billion market cap company. Tyson is one of the world's largest suppliers of beef, chicken, pork, and prepared foods.

The company has a great portfolio of products, and despite their lower margins in meat products, the firm is guided by commodity prices. Tyson operates in a competitive industry, and it has to manage to quickly shift products in order to maintain its position. No one can doubt that the company is a great meat processor with presence in the chicken, beef, and pork segments, which are substitute products depending on prices.

The portfolio was improved due to Tyson’s acquisition of Hillshire in 2014. The deal creates operational efficiencies and a more flexible mix of products. Moreover, the company is focusing on frozen meat-based products rather than frozen foods products.

Although the company had a great amount of debt to finance, the Piotroski F-Score of 7 indicates a very healthy financial situation.

Revenue declined by 15% year over year to $9.15 million, but earnings per share increased by 55% in the most recent quarter.

In the next chart we can appreciate Tyson´s earnings per share growth over the past years. This is very important because the competition makes margins low and achieving earning profit becomes a challenge.

During the past fiscal year, the company increased its bottom line. It earned $2.95 per share versus $2.40 in the previous year. This year, Wall Street expects a further improvement in earnings ($3.96 versus $2.95).

Finally, let's compare the best measure of performance for a firm's management: the return on equity, which is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a ROE of 16.04% that is higher than the one exhibited by Conagra Foods Inc. (CAG, Financial). Analysts consider ROE ratios in the 15% to 20% range as representing attractive levels for investment. For investors looking at those levels or more, Kellogg (K, Financial) could be an interesting option. Also, Mead Johnson Nutrition (MJN, Financial) exhibited a very attractive ratio.

It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

Relative valuation

In terms of valuation, the stock sells at a trailing P/E of 19.6x, trading at a discount compared to an average of 20.31x for the industry. To use another metric, its price-to-book ratio of 2.41x indicates a premium versus the industry average of 1.67x, while the price-to-sales ratio of 0.67x is below the industry median of 0.87x. Tyson Foods' P/S ratio is close to the 10-year high of 0.7.

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 $35,606, which represents a 28.5% compound annual growth rate (CAGR).

Hedge fund positions

Jeremy Grantham (Trades, Portfolio) and Jim Simons (Trades, Portfolio) have initiated new positions in the stock in the fourth quarter with 3,900 and 1,735,900 shares. One of the most bullish moves was made by Joel Greenblatt (Trades, Portfolio), who upped his stake by 176.13% to 1.54 million shares.

On the bearish side, Ray Dalio (Trades, Portfolio), David Dreman (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) sold out the stock. Further, John Buckingham (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Scott Black (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) have reduced their positions in the last quarter of 2015.

Final comment

The company has several advantages that may attract investors, including strong earnings growth over the last years. Also, the P/S ratio indicates it is a good moment to buy a cheap stock.

Disclosure: Omar Venerio holds no position in any stocks mentioned.