This week BMO Capital Markets’ elected to cut both their 12-month price target and as well as their rating on Tyson Foods (NYSE: TSN), saying “Our downgrade does not reflect a change in our long-term view of TSN’s ability to affect internal change through its actions, operational improvements, or capacity expansions.” But it’s the view that the underlying fundamentals of certain prices outside chicken will see deterioration over the coming months and years. BMO lowered their 12-month price target from $115 to $99 and their market rating from outperform to market perform.
There are currently 15 analysts covering Tyson Foods, with an average 12-month price target of US$101.18, or a 15% upside to the current stock price. Out of the 15 analysts, 4 have strong buy ratings, 2 have buys and the other 9 analysts have hold ratings on the stock. The street high sits at US$115 from Stephens Inc, which represents a 30% upside.
BMO believes that the investment bull case seems less persuasive at the company’s current valuation as they lower their outlook on beef and pork margins beyond 2022, with input inflation hitting the company’s Prepared Foods segment. To get to their $99 12-month price target, they put a 12-13x P/E on their revised 2023 estimate, it is noted that the BMO has not touched their 2022 estimates as they believe a number of these concerns will start to ferment in 2023 rather than the second half of 2022.
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Though BMO does not provide a breakdown of their new 2023 estimates by revenue segments, they say that the reasons they have lowered their 2023 estimates on beef and pork are due to new capacity coming online, an easing of labor constraints, and a tightening of cattle supply “may create a more rapid return to more normalized margins than we initially anticipated.” They say that the US beef packing industry has announced more than 7 new capacity expansions slated for the next few years, which is on top of beef production growing 5% year over year in February.
BMO admits that Tyson Foods’ financial results have become harder “in light of the sharply competing dynamics within its divisions.” They continue to expect that the company will benefit from a number of fundamentals such as an improvement in chicken sales as limited supply and strong broad-based demand continues. An upgraded chicken operation is lead by operational improvements and pricing momentum across its retail brands. They expect that internal improvements and better fundamentals will help grow chicken margins towards 8% in 2023.
Even though BMO has lowered its 2023 estimates, it continues to believe that the company could outperform its 2022 estimates. They also note that the company has materially outperformed the S&P 500 over the last two years, with it being up 19% versus 8% for the S&P in 2021 ,while being up 1% versus the -12% the S&P is the year to date. They write, “in the wake of TSN’s stock performance, we would be more opportunistic at a more attractive entry point.” They say that the greatest risk to their downgrade is that the upside in chicken fundamentals is offset by the normalization of beef and pork margins.
Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
