Although the shares have been roasted of late, don’t ignore poultry manufacturer, Sanderson Farms, the fourth-largest American processor.
On 14 December it reported forecast–busting figures for the 12 months to October. Sales and underlying earnings per share came in at a juicy $1.9bn and $6.07 respectively. That was on the back of higher prices and the resumption of exports to Russia. What spooked the markets was news that soaring feed costs and growing poultry supplies (up 3%-4%) would weigh on Sanderson in 2011. The firm didn’t lock in grain prices us-ing futures contracts. So, based on current levels, the CEO said the com-pany would have to pay an extra $243m for corn this year.
However, these challenges are only temporary. Per-capita consumption of chicken is expanding, thanks to a growing acceptance of the health benefits of white meat. Sanderson is also the lowest-cost producer. Further, during the recession, demand for fresh chicken remained strong due to surging beef prices. Consumers also prefer to eat at home, rather than dine out at expensive restaurants.
And in a world of rising food prices, it’s hard to imagine a scenario where chicken doesn’t play a major role in people’s diets. Plus food seems a safe bet if you think inflation is going to be a problem, as there’s always solid demand.
Sanderson Farms (Nasdaq: SAFM)
That’s probably why the board have just spent $125m to build a new facility in North Carolina. Once the site is up and running, the firm will be able to process a total of 9.5 million birds per week. Of this total, 4.5 million birds will go to the big-bird deboning segment serving food-service customers, such as TGI Friday’s, and export markets. The remaining five million birds will be sold to supermarkets.
So I’d value the group on a through cycle EBITA multiple of eight. After adjusting for the $10m in net cash and assuming sustainable 7% operating profit margins, that delivers an intrinsic worth of around $50 per share. As with any farming-based organisation, Sanderson is subject to the vagaries of an ever-changing eco-system, as well as to disease, competition, pricing pressure, food scares and global trade wars involving China. All the same, the stock looks to be a tasty bargain.
Recommendation: SPECULATIVE BUY at $40