Tyson Insiders Aren't Too Chicken to Buy

 | May 17, 2013 | 1:00 PM EDT  | Comments
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A Form 4 filed with the Securities and Exchange Commission has disclosed that Kevin McNamara, a member of the board of directors at Tyson Foods (TSN), directly purchased 3,000 shares of stock on May 13 at an average price of $24.55 per share. This came about a week after another board member bought 4,000 shares.

Studies show that stocks bought by at least one insider slightly outperform the market, and there is a somewhat stronger effect for stocks bought by multiple insiders. This makes sense to us -- economic theory suggests that it is rational to increase company-specific risk in this way only if the expected returns are high enough to offset the benefits of diversification. The insider optimism is particularly interesting because Tyson has risen 23% year to date.

Tyson has reported its results for the first quarter of 2013. Cost of goods sold increased significantly during this period from a year earlier, and the company was able to pass only a portion of the higher costs on to customers. As a result, revenue increased only slightly, and earnings were down 36%, making growth in net income negative for the first six months of Tyson's fiscal year. Cash flow from operations has performed even worse: At $230 million, it is about half what it was in the first six months of the last fiscal year and also less than the amount of cash Tyson used on capital expenditures.

At its current market capitalization of nearly $9 billion, the company is valued at 17x its trailing earnings. That figure suggests that the market is expecting earnings to grow or at least recover within the next couple of years. Wall Street analysts seem to believe that improvements in Tyson's bottom line will go even further than that: Consensus is for $2.51 in earnings per share in the fiscal year ending in September 2014, which comes out to a forward P/E of 10.

If the company could hit that target, even low growth beyond that point could make it undervalued. We'd also note that as a food stock, Tyson has somewhat limited exposure to conditions in the broader economy, as shown by its beta of 0.6. However, the dividend yield is only 0.6%, and given the cash situation, we don't expect that to change much in the near term.

Pilgrim's Pride (PPC) is one of Tyson's peers. That company reported 8% revenue growth last quarter compared with the first quarter of 2012, with earnings growing by 39%. Even after this better financial performance, Pilgrim's Pride trades at a small discount in terms of both trailing earnings and forward estimates: Its respective P/E multiples are 16 and 9. So while the sell side also expects this company to increase its earnings considerably over the next couple of years, the growth rate is expected to match that of Tyson's and leave Pilgrim's Pride still somewhat cheaper when all is said and done.

We'd be interested in looking into the reasons for the better recent results at Pilgrim's Pride and seeing if some other factor explains why Tyson's earnings multiples are actually slightly higher. Although Tyson has consensus insider purchases, and although it's possible that the specific issues affecting the business have been temporary, we'd imagine that in general, both companies' prospects are related to industry conditions, and so the purchases at Tyson could be read as bullish on chicken more generally.

As such -- and particularly considering that analyst expectations peg both stocks as potential values, assuming their results stay on target -- investors may be well served by doing more research on these companies.

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