Over the past six months, Tyson Foods’s shares (currently trading at $51.39) have posted a disappointing 8.4% loss, well below the S&P 500’s 21% gain. This might have investors contemplating their next move.

Is now the time to buy Tyson Foods, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.

Why Do We Think Tyson Foods Will Underperform?

Even though the stock has become cheaper, we're cautious about Tyson Foods. Here are three reasons there are better opportunities than TSN and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Tyson Foods grew its sales at a weak 1.1% compounded annual growth rate. This fell short of our benchmarks.

2. Low Gross Margin Reveals Weak Structural Profitability

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Tyson Foods has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 7.4% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $92.64 went towards paying for raw materials, production of goods, transportation, and distribution.

3. EPS Trending Down

Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Tyson Foods, its EPS declined by 25.5% annually over the last three years while its revenue grew by 1.1%. This tells us the company became less profitable on a per-share basis as it expanded.

Final Judgment

Tyson Foods falls short of our quality standards. Following the recent decline, the stock trades at 14.2× forward P/E (or $51.39 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward the most dominant software business in the world.

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