Tyson Looks Primed for a Relief Rally; Williams Sonoma Still a Keeper

Includes: TSN, WSM
by: Stephen Castellano

This week, 57 stocks make our "high-quality" list in the Ascendere Ranking Weekly Update (example), down from 60 last week, with 7 additions and 10 deletions. 35 stocks make the "low-quality" list up from 30 last week with 8 additions and 5 deletions.

The most interesting name to appear on our "high-quality" list this week is Tyson Foods, Inc. (NYSE:TSN), which reports on Monday, November 22. A conference call is scheduled for 9:00 AM.

Tyson Foods Inc. (TSN) is the $5.9b market cap packaged food company that is probably known most for its chicken products. It is particularly interesting that this stock appears on our list as there seems to be widespread expectations for higher grain prices next year, which could negatively impact the company's margins. However, it seems very possible that lower forecast FY2011 earnings are already fully embedded in the stock price, with the consensus FY11 EPS estimate of $1.74 already down $0.20 from $1.94 just three months ago. Given the company's consistent history of demonstrating improving returns on capital, coupled with a very attractive relative valuation and the likely under-weighted positioning of many portfolio managers in the Consumer Staples sector, this idea could work well. If analysts do not take earnings estimates down further following Monday's conference call, this could set the stage for a relief rally in one of the very few attractive companies in the Consumer Staples sector.

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Moving Off the "High-Quality" List

Williams-Sonoma (WSM) is one company moving off the "high-quality" list, not due to lower analyst revisions (revisions did in fact move slightly higher following its November 18 report), but due to lower relative rankings for working capital accruals. Since the higher working capital is likely more a function of seasonality as opposed to core quality, and operating momentum remains very strong, there are still good reasons to own the stock. We think fears of a slow-down in the home furnishing space is overblown given widespread proof of an improving economy at the micro level, and perhaps a bit irrelevant as management seems to be paying particularly close attention to the efficient use of its fixed assets.

Consensus estimates imply flat to slightly up ROIC in the quarters ahead, but we think-- as management continues to shut-down stores and leverage opportunities in the online space-- ROIC could continue to improve at a good pace. Even so, portfolios with high turnover (such as our long-only model based on real trade data) may still find a reason to replace this idea for the time being.

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Disclosure: Long WSM

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