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Is TSN a good defensive investment?

Is TSN a good defensive investment?

When markets become volatile, it usually means that investors are becoming increasingly uncertain and nervous. Uncertainty can come from all kinds of different things – concerns about inflation, wage growth, central bank monetary policy, earnings trends, and geopolitical events. For most of the last three months, most of the uncertainty in the market has revolved around the spectre of trade war between the U.S. and its biggest trading partners. That fear is raising its ugly head once more this week as new tariffs from the U.S. against China are set to take effect on July 6. Besides those tariffs, there are also looming duties against Canada and Mexico along with the steel and aluminum tariffs against the European Union and other trade allies. At the same time the U.S. will begin imposing duties on $34 billion worth of Chinese imports on Friday, Beijing is set to respond in kind with tariffs on a range of products including soybeans, seafood and crude oil.

When economic concerns increase, investors often start to look for investments that are defensive in nature; that is, they’ll usually start moving money into less volatile, more “secure” assets like Treasury bonds and T-bills, or into stocks that they think should be less cyclical in nature and so have less risk than other stocks. Food companies, including Packaged Foods, which is the industry that Tyson Foods, Inc. (TSN) sits in, often fits into that description. While the stock is down since the latter part of 2017 from a high at around $85 per share to its current price around $67, it has also been holding its value pretty well since the beginning of May, when trade war rumors were really beginning to heat up. Does that mean that TSN, whose sales outside of the U.S. accounted for only about 12% of their total sales in 2017, could be a good stock to hold? Let’s take a look.



Fundamental and Value Profile

Tyson Foods, Inc. is a food company, which is engaged in offering chicken, beef and pork, as well as prepared foods. The Company offers food products under Tyson, Jimmy Dean, Hillshire Farm, Sara Lee, Ball Park, Wright, Aidells and State Fair brands. The Company operates through four segments: Chicken, Beef, Pork and Prepared Foods. It operates a vertically integrated chicken production process, which consists of breeding stock, contract growers, feed production, processing, further-processing, marketing and transportation of chicken and related allied products, including animal and pet food ingredients. Through its subsidiary, Cobb-Vantress, Inc. (Cobb), the Company is engaged in supplying poultry breeding stock across the world. It produces a range of fresh, frozen and refrigerated food products. Its products are marketed and sold by its sales staff to grocery retailers, grocery wholesalers, meat distributors, warehouse club stores and military commissaries, among others. TSN has a current market cap of $24.4 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings growing at almost 26%, while sales increased about 7.5%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations.
  • Free Cash Flow: TSN’ Free Cash Flow is healthy, at almost $1.6 billion. That number has increased modestly over the past year, but is about 20% lower since the beginning of 2017.
  • Debt to Equity: TSN has a debt/equity ratio of .73, which is pretty conservative. Their balance sheet indicates operating profits are more than sufficient to service their debt.
  • Dividend: TSN pays an annual dividend of $1.20 per share, which at its current price translates to a dividend yield of 1.79%.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TSN is $33.03 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.0. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Packages Foods industry is 1.7, while the historical average for TSN is 2.0. This implies the stock is fairly valued, without a great deal of upside. On the other hand, the stock’s P/E ratio is currently 38% below its historical average, which many investors will take as a positive valuation sign.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The diagonal red line outlines the stock’s downward trend beginning in December of last year. The stock hit this line in mid-June and reversed lower, but to this point has failed to establish a new, lower pivot low below the dashed blue line I’ve drawn to illustrate the stock’s current support level. Assuming the stock continues to hold above this level, it could begin to draw bullish momentum to push back up to its nearest resistance, which should be around $72 per share (around the yellow dashed line). TThe stock has been holding in this general range since April, when trade fears began to emerge.
  • Near-term Keys: With the stock currently holding around support at about $66, there could be an opportunity for short-term swing traders to take a bullish position using call options or by buying the stock outright if the stock starts to move higher. Look for volume on up days to increase compared to volume on down days, with the price moving above $68.50 per share. On the other hand, if the stock drops below $66, the downward trend will be reconfirmed, with the next most likely support level sitting anywhere between $57 and $60. A break below $66 could be used as a signal to short the stock or to start working put options.


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