Geoff Considine, Ph.D | Oct 05, 2021 20:14
Tyson Foods (NYSE:TSN) investors have had a good year. The total return for TSN YTD is consensus using a larger population of 12 analysts. The consensus rating is outperform (bullish) and the 12-month price target is 12.83% above the current share price. The lowest price target from the 12 analysts is $82, 5% above the current price.
Source: Investing.com
While the analyst coverage for TSN is fairly thin, the ratings and price targets exhibit a fair level of agreement and the two versions of the consensus outlook, from ETrade and Investing.com, indicate a bullish view with expected 12-month price appreciation of 12.5% (averaging the two).
I have analyzed call and put options at a range of strike prices, all expiring on Jan. 21, 2022, to generate the market-implied outlook for TSN for the next 3.6 months (from now until the expiration date). There is a fairly high level of options trading on TSN for this expiration date, which is largely why I chose to analyze January 2022 options. I have also generated the market-implied outlook for the next 8.4 months using options that expire on June 17, 2022. These options are thinly traded, however, so this longer outlook is considered only marginally meaningful.
The standard presentation for the market-implied outlook is a probability distribution of price returns, with probability on the vertical axis and return on the horizontal.
Source: Author’s calculations using options quotes from ETrade
The market-implied outlook to early 2022 has a significant tilt that favors positive returns (a bullish outlook), with the peak probability corresponding to a price return of 3.4% over this period. The distribution exhibits negative skewness, which means that the probability of large negative returns is higher than for positive returns of the same magnitude. The annualized volatility calculated from this distribution is 26.3%.
To make it easier to directly compare the probabilities of positive and negative returns, I look at a version of the market-implied outlook with the negative-return side of the distribution rotated about the vertical axis (see chart below).
Source: Author’s calculations using options quotes from ETrade. The negative return side of the distribution has been rotated about the vertical axis.
This view of the market-implied outlook emphasizes the elevated probabilities of positive vs. negative returns from now until early 2022 (the solid blue line is above the red dashed line for a wide range of the most-probable outcomes). This is a solidly bullish market-implied outlook.
Theoretically, market-implied outlooks are expected to show somewhat elevated probabilities of negative returns, reflecting risk-averse investors' tendency to pay more than fair value for put options. In addition, dividend-paying stocks exhibit somewhat elevated probabilities of negative returns because dividend payments reduce the upside potential. There is no way to robustly estimate the size of these effects, but considering the potential impacts emphasizes the bullishness of this outlook.
The 8.4-month market-implied outlook to June 17, 2022 (calculated using options that expire on this date) shows slightly elevated probabilities of negative returns (the red dashed line tends to be slightly above the solid blue line). The annualized volatility derived from this outlook is 28.8%. In light of the two factors discussed in the previous paragraph, I interpret this market-implied outlook to be neutral. Because of the thin options market at this time horizon, I don’t consider the market-implied outlook to be very meaningful. That side, it would have been a bit concerning if this outlook was very bearish.
Source: Author’s calculations using options quotes from ETrade. The negative return side of the distribution has been rotated about the vertical axis.
The market-implied outlook for TSN is bullish into early 2022 and neutral to mid-year. The expected volatility is 26.3% for the outlook to Jan. 21, 2022, rising to 28.8% for the outlook to June 17, 2022.
Tyson Foods has rallied in 2021, but the current valuation remains reasonable. While the company faces significant near-term challenges due to inflation and labor shortages, the consensus-beating earnings over recent quarters provide some reason for optimism.
As we approach winter, with the potential for higher rates of COVID-19 infections, Tyson’s commitment to maintaining a fully-vaccinated workforce puts the company in a favorable position.
Longer-term, Tyson is moving proactively to diversify into non-meat protein. The new products expand Tyson’s market and allow the firm to benefit from trends favoring lower consumption of meat. The Wall Street consensus outlook continues to be bullish and the 12-month price target has increased, to give the shares an expected 12.5% price appreciation, for a total expected return of 14.8% over the next year.
As a rule of thumb for a buy rating, I look for an expected 12-month return that is at least half the expected annualized volatility. Taking the Wall Street consensus price target at face value, TSN meets this criterion (14.8% expected return vs. annualized volatility of 26.3%-28.8%). The market-implied outlook to early 2022 is bullish. My final overall rating for TSN is bullish.
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