Tyson stock is poised to pop as inventory and margins rise

After the U.S. stock market hit all-time highs, a new level attributed to hype born from the technology sector, few other stocks became as interesting as semiconductor makers and artificial intelligence names. Far from being a Nvidia Co. NASDAQ:NVDAA consumer staples stock known for being boring could be about to steal the spotlight.

Based on fundamentals, Tyson Foods Inc. New York Stock Exchange: TSN is connecting all the dots for Wall Street to return to its former glory. After selling off more than 55% from its all-time high price, this stock has become an overlooked, even disposable, name for any investor.

As things are going, investors looking for better odds at beating the market might be connecting the dots behind Tyson’s massive earnings per share (EPS) growth projections and its double-digit upside set by stock price targets. analysts. But before all the excitement gets even bigger, here’s why Tyson’s actions might still be as good a play as ever.

It’s all about feed prices

The Federal Reserve (the Fed) had to cut interest rates to near zero due to the 2020 COVID-19 pandemic. The resulting effect was a stubbornly high inflation rate, which affected the total price of tickets per supermarket.

Investors quickly realized (as judged by Tyson’s aggressive sell-off) that food manufacturers’ costs had also risen. Sentiment for these traders has become so negative that inventories have been depleted at cyclical lows, according to data from CF Industries Holdings Inc. NYSE:CF.

In its fourth quarter 2023 investor presentation, CF showed that global grain inventory-to-use ratios hit a decade low during 2021-2022, contributing to rising feed costs. As these costs have increased, Tyson’s margins have shrunk to dangerously low levels, especially for beef and chicken.

Needing to bring these inventories back to normal levels, the agricultural sector is once again increasing production. According to the ISM Services PMI Index, the agriculture sector has recorded three consecutive months of growth, demonstrating the growing need for global food supply chains to normalize again.

This is where Tyson’s opportunity comes in, as its margins could expand after feed costs give the company’s operations some breathing room.

Tyson’s Beef: Investor Bullseye

In its first quarter 2024 earnings release, Tyson’s trends show a clear return opportunity. The average beef price change increased 10.5% year over year, bringing total sales to $5 billion (about 37% of all sales).

Chicken, the second largest business with $4 billion in sales (30% of the total), saw its average selling price decrease by 3.9%. Tyson’s competitor, Pilgrim’s Pride Co. NASDAQ:PPCshowed its investors that soybean stocks are back on the rise, closing the first quarter of 2024 up 12% from a year earlier.

This is the effect produced by the CF numbers: farmers have to increase supplies, which helps reduce costs for meat producers like Tyson. In fact, Tyson’s chicken operating margins increased from 1.6% to 4.4% over the year. But what about beef?

Well, beef margins were a significant issue during the quarter, as they contracted to -4.1% compared to 3.5% a year earlier. However, this contraction isn’t all bad news, as beef costs from farm to wholesale have been declining since 2021, moving closer to 2018.

Prices of urea, a major ingredient in livestock feed, dropped significantly during this period. Getting closer to pre-pandemic levels could help Tyson’s beef margins turn positive again, significantly boosting its future EPS.

Wall Street sees a high probability of a rally

Analysts expect EPS growth of up to 58% over the next 12 months, compared to competitor Pilgrim’s Pride’s expected increase of just 2.6% this year. This gap stems from Tyson’s exposure to meats other than chicken and its superior market share.

For twelve months, Tyson’s market share remained at 11.8%, surpassed only by privately held Cargill. Pilgrim’s Pride came in second place with 3.9%, a quarter of Tyson’s lead.

Noticing this large gap, and as the rising VIX sparks feelings of uncertainty, analysts from Barclays New York Stock Exchange: BCS AND Citigroup Inc. NYSE:C they increased their ratings for Tyson.

Be part of Consumer Staples Select Sector SPDR Fund NYSEARCA: XLP and low-beta stocks in its beta of 0.75, Tyson earned a $69 price target from Barclays and a $62 rating from Citigroup, calling for upside of 15% and 3.3% respectively from prices today.

Despite the slow price action, underperforming Pilgrim’s Pride stock by more than 60% over the past 12 months, Tyson stock bears have retreated from the name. Short interest has fallen more than 21% over the past month, bringing the total percentage of shares short to 1.7%. Bulls could invade this stock.

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