Tyson Foods in the Last Few Quarters Essay

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Tyson Foods

In the last few quarters, Tyson Foods has been facing tremendous challenges from rising feed prices and stagnant consumer demand. However, in spite of these issues, management believes that they can be able to overcome them towards the end of year. Our previous analysis revealed that Wall Street analysts were very optimistic about the future and their estimates are too high. This means that there is a possibility of the stock continuing to underperform until more reasonable expectations are taking place. ("Tyson Foods 10K," 2013) ("Tyson Foods," 2013)

To fully understand what is happening, requires carefully focusing why this is occurring. This will be accomplished by justifying the current market price for organization's debt and equity using various capital valuation models. Together, these elements will support the findings from our analysis and research on the company over the next several quarters. ("Tyson Foods 10K," 2013) ("Tyson Foods," 2013)

A Justification for Tyson Foods Levels of Debt in Comparison with Capital Valuation

Depending upon how analysts are looking at Tyson Foods, it is clear that the company has been financing growth through tremendous amounts of debt they have been accumulating over the last several years. Evidence of this can be seen with the fact that the company has total debt to equity ratio of 39.52. However, to determine if the firm can maintain these amounts requires carefully examining these figures with the asset accumulation approach. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013)

This model is one way to decide if a firm is facing fiscal problems from carefully looking at the total assets in contrast with the levels of debt. This is because if the company is facing severe fiscal challenges, executives will more than likely turn to assets they can quickly liquidate in order to reduce their debt. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013)

In the case of Tyson Foods, the company has a total amount of outstanding debt of $2.42 billion. The assets that they have listed on their balance sheet are $11.78 billion. The current assets are sitting at $5.29 billion. This is indicating that the company has enough funds to cover any kind of liability issues with their current and total assets being more than the outstanding levels of debt. This means that if the firm were to become financially challenged, managers can easily sell off some of their current assets to raise cash. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013)

For instance, in one of the figures computed inside the current assets are the inventories of $2.92 billion. This is higher than their outstanding debt and it could quickly be liquidated to pay off any kind of notes coming due. These figures are showing, how the company is not being overwhelmed by high levels of liabilities. Instead, it means that the firm can be able to obtain financing in the capital markets and maintain their credit rating in the process. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013)

This is showing how Tyson Foods is not anywhere close to facing issues of insolvency. Instead, it is highlighting that the company can handle their current levels of debt and has the ability to liquidate assets in order to reduce these amounts. During a worst case scenario, this enables them to continue to meet their basic obligations, protect market share and make adjustments with the challenges they are facing. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013)

A Justification for Tyson Foods Levels of equity in Comparison with Capital Valuation

To determine the equity levels requires using the discounted cash flow method. Under this approach, there is a focus on the future free cash flow. These elements will highlight if the company's earnings are sustainable and they can continue with their current approach in the future. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013)

In the case of Tyson Foods, the company has discounted free cash flow of $244 billion. The below formula is used for deriving these figures.

DCF=CF1 / (1+r) 1 + CF2 / (1 + r) 2

This is showing that the company's free cash flow is expected to increase in the next two years. The main reason why, is from carefully examining the figure provided in the 10K form (which is showing $233 million). Then, utilizing this formula to determine how these increases will occur in the future. Over the next two years, these numbers are expected to rise to $244 million. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013)

This is showing how the company will experience a 4.72% increase in the free cash flows over the next two years. As a result, the company is experiencing an increase in their bottom line results and the ability to deal with a variety of challenges future. Yet, this is taking place at a moderate pace and there is slower growth projections occurring. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013)

The price earning model is illustrating how the company has a low forward price earnings ratio. These numbers are important, as a low figure is indicating that the price of the stock could be undervalued in contrast with the markets. Given the fact, that the company has a multiple of 10.0 is illustrating that shares are undersold. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013) ("Tyson Foods," 2013)

These figures were derived from looking at the future earnings per share in comparison with the price of the stock.

Future EPS / Price of the Stock

This is indicating that Tyson Foods has the potential for growth based upon these numbers. However, in the last several quarters, the company has missed their earnings per share projections from increased volatility in food prices and unstable consumer demand. In the past year, the company earned a total of $1.89. This gives the stock a PE ratio of 7.40. This was calculated using the below formula. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013) ("Tyson Foods," 2013)

EPS / Price of the Stock

In the next year, analysts are expecting the company to earn $2.50. This is based upon the company seeing a reduction in feed prices and an improvement in consumer demand. In the last year, these earnings have been very volatile with Tyson Foods missing their numbers in two of the last four quarters. This is indicating that the earnings are unstable and could become more volatile in the future (especially if the price of feed does not slowdown). If this were to occur, the EPS could be reduced towards the $2.10 range. This would give the company a forward price earnings ratio of 7.8. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013) ("Tyson Foods," 2013)

On the surface, this looks like a good buy. However, the problem is that these issues could cause the price of the stock to remain within a trading range until more clarity is provided. If this were to happen, the company could test $27.00 and may have trouble breaking these levels. At the same time, any kind of decreases in the EPS would create a situation where the price of the stock could decline (based upon the more negative views). ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013) ("Tyson Foods," 2013)

As a result, the best case scenario that can be realized over the next year is a rate of return of 6.0%. However, there is possibility that these figures could become negative. This is because any kind of reduction in the EPS could cause a sell off. ("Tyson Foods 10K," 2013) ("Business Valuation Methods," 2013) ("Tyson Foods," 2013)

The best valuation model which is supporting our findings is the free cash flow approach. This is showing, how the company is undervalued in comparison with historical averages. Yet, there are no real catalysts which…[continue]

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