Tyson Foods Shareholders Scramble for the Exits After Weak Quarter

Tyson Foods, Inc. (TSN) stock is trading lower by nearly 9% in Monday's pre-market after missing second quarter 2020 top- and bottom-line consensus estimates. The company posted earnings per share (EPS) of $0.77 in the quarter, just half of analyst estimates, while $10.89 billion in revenues fell below $11.01 billion expectations. The stock has now dropped 40% off the all-time high posted on Jan. 13, despite its membership in the hot-performing staple foods sector.

More than a dozen meat processing plants have been shut down due to the coronavirus pandemic, taking a toll on revenues and the country's food chain. In response, President Donald Trump has invoked the Defense Production Act, which authorizes the executive office to send workers back to their stations. Tyson noted the headwinds in its earnings release, advising "these challenges are anticipated to increase our operating costs and negatively impact our volumes for the remainder of fiscal 2020."

Other U.S. meat producers are facing similar troubles, with Smithfield Foods recently shutting down pork plants in Illinois, Wisconsin, Missouri, and South Dakota. Workers in these industries are forced to stand "shoulder to shoulder" without protective gear while alleging that they've faced disciplinary action when coughing or sneezing because it slows down production. Smithfield is owned by WH Group Limited (WHGRF), a publicly traded meat and food processor headquartered in Hong Kong.

The shutdowns have raised fears about empty supermarket shelves and a nationwide meat shortage that will drive up costs and inflation. Adding to consequences, beef and pig farmers are reporting major surpluses because they can't get their livestock to slaughterhouses, forcing them to increase capacity or reduce herd size. These roadblocks are having a ripple effect in the futures markets, with hog and cattle contracts near multi-year lows.

TSN Long-Term Chart (2007 – 2020)

A multi-year uptrend stalled just below decade-long resistance in the mid-$20s in July 2007, giving way to an orderly pullback to two-year support, followed by a breakdown to a 10-year low during the 2008 economic collapse. The subsequent recovery wave finally completed a round trip into the prior high in 2013, yielding an immediate breakout that stalled in the mid-$40s in the first quarter of 2015.

Bullish price action cleared that barrier in November 2015, generating a steady uptick into the September 2016 high at $77.05, ahead of a steep slide that ended at a nine-month low in the mid-$60s after the presidential election. The stock has posted two higher highs and an equal number of lower lows in the past three years, carving the outline of a bearish expanding formation, which is also known as a megaphone pattern. 

The last rally wave surged above the December 2017 peak at $84.65 in August 2019, yielding a quick advance to $94.07. Failed breakout attempts in November and January 2020 completed a triple top that broke to the downside in February, establishing new resistance in the mid-$70s. At the other end, the first quarter decline cut through the December 2018 low at $49.77 before hitting a four-year low, while the bounce has remounted that trading floor.

TSN Short-Term Chart (2018 – 2020)

The short-term uptick stalled in the mid-$60s on March 25, while two April breakout attempts failed to clear that barrier. This morning's steep decline reinforces resistance at that level and the 50-day exponential moving average (EMA), which has contained price action since a January breakdown. The stock lost a full year of buying interest in the first quarter, dropping the on-balance volume (OBV) accumulation-distribution indicator to the lowest low since April 2019.

The pre-market sell-off has also broken support near $58.50, exposing immediate downside into the lower $50s. More importantly, the rollover raises the odds for a critical test at the March low and megaphone support in the $40s. Traders should watch OBV if that happens because a breakdown through the red line ahead of price predicts that the stock will soon follow, confirming a downtrend that could reach the lower to mid-$30s.

The Bottom Line

Tyson Foods stock is selling off after a weak quarter, warning that the meat processor's shares could drop to five- or six-year lows in the coming months.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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