Piper Sandler analysts downgraded Tyson Foods (NYSE:TSN) stock from Neutral to Underweight on Tuesday, flagging various risks that are not currently reflected in the stock’s price, including potential increases in cattle costs and the possibility of declining beef prices.
The forecast for Tyson’s fiscal year 2024 earnings per share (EPS) remains at $2.69, but the projection for fiscal year 2025 EPS has been reduced from $4.73 to $3.45.
Furthermore, Piper Sandler has lowered its price target for Tyson shares from $57 to $50, aligning the target with approximately 12x EPS estimate for the calendar year 2025. This adjustment aims to better match Tyson’s historical average price-to-earnings ratio of around 11.6 times.
Among key points raised in the report, analysts said that while beef margins could worsen, consumer demand has been unexpectedly robust. However, the firm anticipates that cattle supply issues could further deteriorate before improving.
“The supply situation can likely get worse before it gets better; any boost to supply would take ~2 years to come through,” analysts wrote.
“Even as supply has downside risk near-term (potentially driving higher input costs), unusually favorable pricing also poses a risk if consumer demand softens, as we would have already expected it to do,” they added.
In the poultry sector, Piper Sandler points to signs that chicken supply is set to increase, which could put downward pressure on pricing.
The firm observes that the number of eggs set and chicks hatched in the U.S. has been growing, with eggs set reaching a two-year high in early August 2024 and chicks hatched up by over 2.5% year-over-year since July. Increased market supply of chicken is expected to challenge pricing stability.
Tyson’s significant efficiency gains from chicken plant closures in early fiscal year 2024 are largely realized, and further margin improvements in fiscal year 2025 are unlikely to be substantial, Piper Sandler notes.
Tyson may seek to enhance margins through a shift to more value-added products, but this strategy faces challenges from intense competition, increased marketing investments, and promotional costs.
