Unlock: Tyson Foods (TSN) Trade Idea – Calls closed for 100% Gain
Sector: Food Processing
Current Price: $42.56
Stop Loss: $40.70
Time Duration: 59 Days
Trade Idea: Buy TSN September 44 calls for $0.95 or less.
TSN has plenty of upside call open interest built over time, but the action that we find interesting today is buyers of 1,300 September 44 calls for $0.95. We like TSN going into earnings on August 3.
Some color from the previous quarter while we collect thoughts from Credit Suisse research report: 2Q EPS of $0.75 beat consensus by $0.03 and management maintained EPS guidance for 2015 and 2016. Both the company’s results and its comments on the call gave more ammunition to the bull case that Tyson is transforming into a more predictable, more resilient business with less vulnerability to the commodity markets. Chicken delivered an in-line operating margin of 11.7% despite weaker leg quarter exports stemming from the Avian Influenza break-out. Tyson beat and raised its Prepared Foods division margin estimate for the year thanks to stronger Hillshire acquisition synergies and more favorable pork inputs.
The most important takeaway from that call that doesn’t get enough attention is management plans to accelerate the one-chicken short strategy in FY 16. TSN intends to keep its chicken slaughter flat in FY 16 and further accelerate white meat purchases from outside suppliers to keep up with demand. TSN is currently buying about 2% of its chicken needs from outside suppliers (up 50% in FY 15), and anticipating increasing to 3% in FY16. That calls for higher margins and speaks for solid demand and we believe they will talk further about this in upcoming release.
Fundamentally it is not expensive. Trading at 0.52x EV/Sales, 7x EV/EBITDA, 12.5x PE, 8.5x OCF and pays 0.9% dividend yield.