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Sanderson Farms Plucks Along
Poultry producer Sanderson Farms (Nasdaq:SAFM) encountered a favorable poultry environment considering the severe heat wave that has affected much of the U.S. this year. Yet as simple as the business of selling chicken may seem, several factors all have an important affect on the performance of a producer such as Sanderson.
IN PICTURES: 5 Tips To Reading The Balance Sheet
For the 2010 fiscal third quarter, the company reported net income of $36.1 million, or $1.55 per share, compared with $43.0 million, or $2.06 per share, for the third quarter of fiscal 2009. Net sales for the third quarter of fiscal 2010 were $489.1 million compared with $504.8 million for the same period a year ago. So far this year, net sales for the first nine months of fiscal 2010 were $1.4 billion compared with $1.3 billion for the first nine months of fiscal 2009.
Down on the Farm
Despite poultry prices being less this quarter than the same period last year, Sanderson's results were buffered by a continued demand from the retail side. Burned by the Great Recession of 2008, both cash strapped and more cost conscious consumers are opting to visit the grocery store more and eating out less. Selling via the grocery is obviously an important channel, but it is just one. Sanderson also sells to restaurants and that side has been hurt by fewer visits. The price of feed is also an important variable; so far, results have not suffered due to slightly lower prices of corn and soybean meal today versus a year ago.
Lots of Moving Parts
Despite the stable global appetite for poultry, the price of other meats, namely beef and pork, also affect poultry demand. When one is cheaper relative to the others, consumers often make a switch.
Politics also can be an important factor. During the quarter, Sanderson's results were hurt by a Russian ban of poultry from the United States. Prior to the ban, Russia was once the largest export market for U.S. chicken. Sanderson recently announced that it was again shipping chicken to Russia, news that outweighed the weaker than expected quarterly results and lifted shares by over 5% on the news.
Despite the rise in share price, Sanderson looks attractive relative to its peers. Shares trade for under nine times earnings and the company has no net debt. By comparison, Pilgrim's Pride (NYSE:PPC) trades for 7.3 times earnings but has approximately $1 billion in net debt against a market cap of $2.4 billion. The 800-pound chicken in the industry, Tyson Foods (NYSE:TSN), sits on over $1.5 billion in debt and trades at 52-times earnings, although that valuation is elevated due to losses.
Sanderson also boasts some the strongest net margins in the industry at 6%, versus 2% for Pilgrim's Pride, and less than 1% for Tyson. South of the border, Industrias Bachoco (NYSE:IBA), a poultry producer in Mexico, has a cash rich balance sheet, 3% margins and a 17 P/E multiple. Despite the strong capitalization, exercise greater caution in investing outside the U.S., especially in an industry such as poultry.
The Bottom Line
Sanderson Farms operates in an essential yet very delicate business with a lot of moving parts. On a comparison basis with its major peers, Sanderson appears to be the most attractively valued and getting back its business in Russia should help the company regain some of what it lost.
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IN PICTURES: 5 Tips To Reading The Balance Sheet
For the 2010 fiscal third quarter, the company reported net income of $36.1 million, or $1.55 per share, compared with $43.0 million, or $2.06 per share, for the third quarter of fiscal 2009. Net sales for the third quarter of fiscal 2010 were $489.1 million compared with $504.8 million for the same period a year ago. So far this year, net sales for the first nine months of fiscal 2010 were $1.4 billion compared with $1.3 billion for the first nine months of fiscal 2009.
Down on the Farm
Despite poultry prices being less this quarter than the same period last year, Sanderson's results were buffered by a continued demand from the retail side. Burned by the Great Recession of 2008, both cash strapped and more cost conscious consumers are opting to visit the grocery store more and eating out less. Selling via the grocery is obviously an important channel, but it is just one. Sanderson also sells to restaurants and that side has been hurt by fewer visits. The price of feed is also an important variable; so far, results have not suffered due to slightly lower prices of corn and soybean meal today versus a year ago.
Lots of Moving Parts
Despite the stable global appetite for poultry, the price of other meats, namely beef and pork, also affect poultry demand. When one is cheaper relative to the others, consumers often make a switch.
Despite the rise in share price, Sanderson looks attractive relative to its peers. Shares trade for under nine times earnings and the company has no net debt. By comparison, Pilgrim's Pride (NYSE:PPC) trades for 7.3 times earnings but has approximately $1 billion in net debt against a market cap of $2.4 billion. The 800-pound chicken in the industry, Tyson Foods (NYSE:TSN), sits on over $1.5 billion in debt and trades at 52-times earnings, although that valuation is elevated due to losses.
Sanderson also boasts some the strongest net margins in the industry at 6%, versus 2% for Pilgrim's Pride, and less than 1% for Tyson. South of the border, Industrias Bachoco (NYSE:IBA), a poultry producer in Mexico, has a cash rich balance sheet, 3% margins and a 17 P/E multiple. Despite the strong capitalization, exercise greater caution in investing outside the U.S., especially in an industry such as poultry.
The Bottom Line
Sanderson Farms operates in an essential yet very delicate business with a lot of moving parts. On a comparison basis with its major peers, Sanderson appears to be the most attractively valued and getting back its business in Russia should help the company regain some of what it lost.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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