Over the last six months, Tyson Foods’s shares have sunk to $57.09, producing a disappointing 17% loss - a stark contrast to the S&P 500’s 4.7% gain. This was partly driven by its softer quarterly results and 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? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why do we think Tyson Foods will underperform?

Despite the more favorable entry price, we don’t have much confidence in Tyson Foods. Here are three reasons why TSN doesn’t excite us, plus one stock we’d rather own.

1. Sales volumes stall, demand waning

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

Tyson Foods’s quarterly sales volumes have, on average, stayed about the same over the last two years. This stability is normal because the quantity demanded for consumer staples products typically doesn’t see much volatility.

2. Projected revenue growth shows limited upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Tyson Foods’s revenue to stall, according to S&P, close to its 1.5% annualized growth for the past three years. This projection doesn’t excite us and implies its newer products will not lead to better top-line performance yet.

3. 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 6.9% gross margin over the last two years. That means Tyson Foods paid its suppliers a lot of money ($93.05 for every $100 in revenue) to run its business.

Final judgment

We see the value of companies helping consumers, but in the case of Tyson Foods, we’re out. After the recent drawdown, the stock trades at 16.4× forward P/E (or $57.09 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.

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