S&P Sees Strong Price Appreciation for Tyson Foods (TSN)

S&P sees 2 chickens in every pot when it comes to Tyson foods. TSN. In the July 14, 2010 edition of The Outlook, S&P selected Tyson, 'Focus Stock.' S&P expects Tyson to benefit from tight meat supplies, and stable feed prices. But the real growth is overseas. S&P further elaborates: “We expect Tyson Foods shares to benefit from global economic growth, changing consumer diets in developing international markets, improved product pricing, and what we expect will be the company’s additional success in creating operational efficiencies. Furthermore, we expect Tyson’s strategy to include a focus on an expansion in value-added food products.” Here is their summary of the financials: “In the first half of fiscal 2010 (ending September), Tyson reported sizable profit improvements at all four of its business segments compared to the year-earlier period. From the beef segment, profits increased to $245 million from $28 million, on benefits from production efficiencies and higher export sales. Volume was up 6.3%, and the average selling price rose 0.8%. Tyson’s chicken business recorded a first-half profit of $192 million compared to a year-earlier loss of $332 million, helped by a $252 million favorable swing in the impact of derivative activities." Going forward S&P forecasts: “In fiscal 2010, we forecast that Tyson’s chicken profit margin will widen significantly, at least partly due to the expiration of adverse commodity hedging contracts in mid-fiscal year 2009. In the first half of fiscal 2009, the company reported a $321 million loss on grain and energy hedging contracts after locking in positions at relatively high price points in fiscal 2008. Also, in both the beef and pork segments, we look for wider margins and sizable profit improvement in fiscal 2010, and note that Tyson recently increased its normalized profit margin ranges for both of these businesses. We think the beef segment should benefit from the closing of some regional plants and efficiency gains. Additionally, we have seen strengthening in Tyson’s balance sheet. The company reduced net debt to $2.1 billion at the end of the fiscal 2010’s second quarter, from about $2.9 billion two years earlier." The stock is trading at about 9.3 times S&P’s 4th quarter forward (EPS) estimate of $1.87. This multiple is sharply below a comparable median P/E that they calculate since year-end 1999. The 12-month target price of $23 is 12.3 times their forward EPS estimate and is based on expectations for improving world economies, improved pricing for protein-related products, and relatively attractive feed prices. In summary S&P concludes: “Reaching this target multiple would still have the stock trading at a discount to the long-term P/E median, but, in our view, would better reflect the growth opportunities we see for Tyson in a protein hungry world. Risks to our recommendation and target price include weaker than expected demand and prices, industry production that is higher than anticipated, and an adverse impact from currency exchange rate fluctuations.”