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Value Investing Research Since 2006

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Monday, June 18, 2018

Tyson Foods Analysis – July 2015 Update $TSN


220px-Tyson_Foods_logo.svgTyson Foods (TSN) has several traits which may attract investors, including strong earnings growth over the last few years. In addition, many qualitative factors make the company interesting to numerous investors. For example, Seeking Alpha contributor Value Wagon recently wrote that Tyson Food’s strong market position in both chicken and non-chicken markets makes it a good value for the industry. This is a great qualitative issue to consider, but one must first look at a quantitative analysis of the company.

In fact, Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to determine a potential investment’s merits. Here’s an updated look at how the company fares in the ModernGraham valuation model.

This model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using theModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.

TSN Chart

TSN data by YCharts

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Defensive Investor – Must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – Market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – Current ratio greater than 2 – FAIL
  3. Earnings Stability – Positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – Has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – Earnings per share has increased by at least one-third over the last 10 years, using three-year averages at the beginning and end of the period – PASS
  6. Moderate PEmg (price over normalized earnings) ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – Must pass at least 4 of the following 5 tests tobe suitable for a Defensive Investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – Current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt-to-Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – Positive earnings per share for at least 5 years – PASS
  4. Dividend Record – Currently pays a dividend – PASS
  5. Earnings Growth – EPSmg greater than that 5 years ago – PASS

Valuation Summary

Key Data

Recent Price $42.95
MG Value $96.04
MG Opinion Undervalued
Value Based on 3% Growth $36.17
Value Based on 0% Growth $21.20
Market Implied Growth Rate 4.36%
Net Current Asset Value (NCAV) -$20.49
PEmg 17.22
Current Ratio 1.40
PB Ratio 1.91

Balance Sheet – March 2015

Current Assets $5,668,000,000
Current Liabilities $4,051,000,000
Total Debt $6,438,000,000
Total Assets $23,526,000,000
Intangible Assets $11,912,000,000
Total Liabilities $14,171,000,000
Outstanding Shares 415,000,000

Earnings Per Share

2015 (estimate) $3.29
2014 $2.37
2013 $2.12
2012 $1.58
2011 $1.97
2010 $2.06
2009 -$1.49
2008 $0.24
2007 $0.75
2006 -$0.58
2005 $1.04

Earnings Per Share – ModernGraham

2015 (estimate) $2.49
2014 $2.07
2013 $1.70
2012 $1.28
2011 $0.99
2010 $0.40

Dividend History

TSN Dividend Chart

TSN Dividend data by YCharts

Conclusion

Tyson Foods does not qualify for the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned by the low current ratio along with the insufficient earnings stability over the last ten years, while the Enterprising Investor is only concerned with the level of debt relative to the current assets. Therefore, all value investors should only proceed with the next stage of the analysis, which is a determination of an estimate of intrinsic value, with a speculative attitude in mind.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $0.99 in 2011 to an estimated $2.49 for 2015. This level of demonstrated growth outpaces the market’s implied estimate for earnings growth of 4.36% over the next 7-10 years.

The company’s recent earnings history shows an average annual growth in EPSmg of around 30%; however, the ModernGraham valuation model reduces such a rate to a more conservative figure, assuming some slowdown will occur. Even so, the model returns an estimate of intrinsic value falling well above the current price, indicating Tyson Foods is undervalued at the present time.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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