Tyson Foods has had an impressive run over the past six months as its shares have beaten the S&P 500 by 22.2%. The stock now trades at $64.98, marking a 24.7% gain. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Tyson Foods, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Tyson Foods Will Underperform?

Despite the momentum, we don't have much confidence in Tyson Foods. Here are three reasons why TSN doesn't excite us and a stock we'd rather own.

1. Sales Volumes Stall, Demand Waning

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

Tyson Foods’s quarterly sales volumes have, on average, stayed about the same over the last two years. This stability is normal because the quantity demanded for consumer staples products typically doesn’t see much volatility.

2. Low Gross Margin Reveals Weak Structural Profitability

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products, has a stronger brand, and commands pricing power.

Tyson Foods has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 7.1% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $92.94 went towards paying for raw materials, production of goods, transportation, and distribution.

3. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Tyson Foods, its EPS declined by 16.2% annually over the last three years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.

Final Judgment

We see the value of companies helping consumers, but in the case of Tyson Foods, we’re out. With its shares topping the market in recent months, the stock trades at 15.8× forward P/E (or $64.98 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward a top digital advertising platform riding the creator economy.

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