An Intrinsic Calculation For Tyson Foods Inc (NYSE:TSN) Shows It’s 38.52% Undervalued

How far off is Tyson Foods Inc (NYSE:TSN) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the foreast future cash flows of the company and discounting them back to today’s value. This is done using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in November 2018 so be sure check out the updated calculation by following the link below.

View our latest analysis for Tyson Foods

The model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow estimate

2019 2020 2021 2022 2023
Levered FCF ($, Millions) $1.50k $2.04k $2.31k $2.34k $2.38k
Source Analyst x7 Analyst x2 Analyst x1 Est @ 1.55% Est @ 1.55%
Present Value Discounted @ 8.59% $1.39k $1.73k $1.80k $1.69k $1.58k

Present Value of 5-year Cash Flow (PVCF)= US$8.2b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 8.6%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$2.4b × (1 + 2.9%) ÷ (8.6% – 2.9%) = US$43.4b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$43.4b ÷ ( 1 + 8.6%)5 = US$28.8b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$36.9b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $100.98. Compared to the current share price of $62.08, the stock is quite undervalued at a 39% discount to what it is available for right now.

NYSE:TSN Intrinsic Value Export November 13th 18
NYSE:TSN Intrinsic Value Export November 13th 18

The assumptions

I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Tyson Foods as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.6%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For TSN, there are three relevant aspects you should further examine:

  1. Financial Health: Does TSN have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does TSN’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of TSN? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.