Stock Analysis: Comparing Companies in the Consumer Staples Sector
Whenever conducting research on companies, it’s important to compare them to their sector peers in order to gain a better understanding of the stock’s potential. For example, on November 11, I wrote an article covering one of the nation’s biggest consumer staple stocks, Kraft Heinz (KHC). In that article, I mentioned that I monitor two groups in its sector:
“I’m watching two groups of stocks in this sector. Companies with strong pricing power and consistent long-term outperformance and players that are struggling more with elevated inflation.”
To illustrate this comparison, I highlighted PepsiCo (PEP) as a company with strong pricing power and consistent long-term outperformance, while classifying The Kraft Heinz Company as one of the companies struggling with elevated inflation.
One of the more intriguing companies in the second group of struggling companies with hidden value is Tyson Foods (NYSE:TSN), a giant in the meat processing industry. This year, I have written two articles on the company, one with a bullish outlook and the other with a more conservative view.
Hope From Sequential Improvements
Although Tyson operates in the consumer defensive sector, it hasn’t been a very defensive investment for investors. After peaking in early 2022, the stock has sold off close to 50%. This is one of the worst sell-offs in its recent history. In general, TSN is more volatile than some of the blue-chip stocks you may hold in your portfolio – like PepsiCo.
The company has faced a number of risks related to commodity prices, labor intensity, and slim margins. Its recent 4Q23 numbers confirm some of these trends, including a decrease in total sales and adjusted operating income. However, there have been signs of improvement in certain segments, such as resilience in the Prepared Foods segment and modest volume growth and sequential profit improvement in the Chicken segment.
What’s Next?
Looking ahead, Tyson’s future strategies include sustaining and building on the strength of Prepared Foods, aligning with the right suppliers and customers in Beef, and driving operational improvements in Pork. The company also has its sights set on achieving an adjusted operating income of $1.0 billion to $1.5 billion in fiscal 2024, which is a positive development for shareholders.
High Expected Shareholder Returns
In addition to its business improvements and decent outlook, Tyson has focused on maintaining financial strength, ending the fiscal year with $3 billion of liquidity and a net leverage ratio just over 4x (EBITDA). Its capital allocation priorities include maintaining an investment-grade credit rating and returning to net leverage at or below 2x net debt to EBITDA. Analysts expect the company to lower the net debt ratio to 2.3x by FY2026, with a key factor being the increase in EBDITA to reduce the net leverage ratio.
The company has also returned capital to shareholders through dividends and share repurchases, with expectations of rebounding earnings and an anticipated EPS growth in the coming years, leading to potential elevated returns for investors.
While the company currently faces some risks, its positive outlook and business improvement plans align with Wall Street’s expectations, indicating a potential for significant earnings growth and elevated returns in the years to come.
Overall, Tyson Foods presents an opportunity for investors based on its future strategies, financial strength, and potential for shareholder returns.
