Tyson stock could see a boost in profits as costs normalize

Key Points

• Tyson stock has been beaten down in the past two years; as the underlying story changes, it could suddenly be a buy.
• Fundamental trends point to one clear path to push the stock price higher, and markets have noticed.
• Analyst projections and market pricing of the stock suggest that a new chicken rally may be underway.

The markets have been on a wild tear so far into the new year, with indices like the S&P 500 and NASDAQ hitting fresh all-time highs. However, not all sectors – and stocks – are created equal in this new rally, which begs the question as to whether there will be a pullback scenario or rather a 'catch up' on the part of the names that are falling behind.

Particularly in names that have fallen out of favor from the market sentiment and popularity contest, such as Tyson Foods NYSE: TSN. This stock has been beaten down severely in the past two years, falling by as much as 56% from its all-time high price of $100.70 a share back in 2022. While the market was justified in selling this stock off, the story looks a lot different today.

There are plenty of reasons why defensive stocks found within the Consumer Staples Select Sector SPDR Fund NYSEARCA: XLP could begin to attract a lot of investor sentiment, resulting in investment inflows. Of course, MarketBeat has done the homework to bring you a roadmap for where you can find alpha for your portfolio.

Landscape improvements

Tyson's stock began selling off so harshly due to the rampant increase in the cost of chicken, which included chicken feed and supply chain restrictions resulting from the COVID-19 pandemic peak months. According to Bloomberg Intelligence, a few cracks in the soybean market show a potential path to cost normalization.

According to the CME Group NASDAQ: CME, soybean futures have fallen by as much as 300 points since November 2023. This means higher profit margins for meat producers that depend on chicken feed costs. Because chicken feed is tightly related to soybeans – and their prices – this price decline will directly translate into lower costs.

You can also see this at play in the latest figures for the ISM Services PMI index, where the top executives of the agricultural sector mentioned that prices have "become more favorable" despite stubbornly high beef prices. The key in this message is that chicken prices were not mentioned, meaning they no longer pose a problem for the industry.

Likewise, the agricultural sector saw its second consecutive month of growth, building on the fundamental thesis pushing for a potential price recovery in Tyson stock. If this isn't enough reason for you to look at the stock, consider.the company's latest quarterly earnings in which Tyson mentions a turnaround in their chicken department.

One of the main trends in their presentation points to earnings per share improvements in the fourth quarter, led by chicken. This is a crucial trend for you to watch out for during this week's earnings announcement since a continuation would push more analysts to come and consider the situation further.

McDonald's NYSE: MCD is another stock that is heavily dependent on the price of chicken. However, McDonald's carries a much larger business moat with it. MCD stock is flirting with breaking past new all-time high prices. Their recent financial releases show increased margins, directly reflecting how a slight decrease in chicken costs multiplies across their massive economic scale.

Markets are betting

When you break down the stocks that operate in the economy's food manufacturing/production area, Tyson's stock quickly begins to stand out.

Because the market is tittering between a continued bull run on the back of FED interest rate cut announcements and being careful not to get carried away until a sensible timeline is laid out, these 'non-cyclical' stocks begin to shine.

Because of these dynamics, the market will likely prefer stocks that offer above-average growth potential at a discounted price, where Tyson becomes a prime candidate. The meat products industry, including other names like Pilgrim's Pride NASDAQ: PPC, is expected to grow its EPS by an average of 21.1% over the next twelve months.

Tyson analysts are pushing for a projected 74.4% EPS jump next year, pacing it almost five times above the industry's average. Now, are markets standing by this decision? The answer is yes on a forward price-to-earnings basis, which is the market's way of placing a value today on tomorrow's expected earnings.

A 16.6x forward P/E places Tyson stock at a 12.0% premium to the sector's 14.8x average. This implies that markets are willing to overpay for the above-average earnings in a self-fulfilling confirmation of a bullish bias. If this pricing evidence wasn't enough, the stock is offering shareholders a 3.5% dividend yield today.

Understanding that this yield is the highest the stock has offered in its history, it serves as another argument to build on a potential price breakout thesis in the coming months. Chicken feed turns into chicken profit.