Piper Sandler analysts have downgraded Tyson Foods (NYSE:) stock from Neutral to Underweight, identifying several risks not currently reflected in the stock’s price. These risks include potential increases in cattle costs and the possibility of declining beef prices.
The earnings per share (EPS) forecast for Tyson’s fiscal year 2024 remains set at $2.69. However, the EPS projection for fiscal year 2025 has been adjusted downward from $4.73 to $3.45.
Piper Sandler has also reduced its price target for Tyson shares from $57 to $50. This new target corresponds to approximately 12 times the EPS estimate for calendar year 2025 and aims to align with Tyson’s historical average price-to-earnings ratio of around 11.6 times.
In their report, analysts highlighted concerns that beef margins could worsen, despite unexpectedly strong consumer demand. They foresee that cattle supply issues might deteriorate further before showing signs of improvement.
“The supply situation can likely get worse before it gets better; any boost to supply would take ~2 years to come through,” the analysts noted.
They also pointed out that while short-term supply risks could drive higher input costs, favorable pricing could pose a risk if consumer demand weakens more than anticipated.
In the poultry sector, Piper Sandler identified signs indicating a likely increase in chicken supply, which could exert downward pressure on prices.
Observations show that the number of eggs set and chicks hatched in the U.S. has been on the rise, with eggs set hitting a two-year high in early August 2024 and chicks hatched increasing by over 2.5% year-over-year since July. This increased market supply of chicken is expected to challenge price stability.
The report also mentioned that Tyson’s significant efficiency gains from chicken plant closures earlier in fiscal year 2024 have largely been realized, and any additional margin improvements in fiscal year 2025 are likely to be limited.
Tyson may attempt to enhance margins by shifting to more value-added products, though this strategy is expected to face challenges due to intense competition, increased marketing investments, and promotional costs.