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Remember
the “original white meat?” Yes, chicken
and more specifically a Zacks Rank #1 stock called Sanderson Farms SAFM might
be
worth a look as part of your portfolio smorgasbord.
Aside
from my love for the meat itself, chicken and the companies that
produce them have
been on my radar for some time. In 2011
I did quite a bit of research into the chicken industry titans such as
Tyson,
Pilgrim’s Pride and today’s bull, Sanderson Farms. I have
mentioned Sanderson as a favorite on
Fox Business several times, including this
appearance just ahead of the New Year (chicken comments start
around 3:30).
Chicken
producers including Sanderson went on a tear from late 2011 into mid
2012 and
then took at bit of a beating late last year due to skyrocketing feed
costs,
plummeting chicken prices and reduced consumption.
Sanderson
has resumed its bullish run over the last 6 months and despite the fact
that
shares are up nearly 40% since late December, Sanderson continues to
prove why
it still should be part of your portfolio.
Food
Inc
Companies like Tyson
Foods TSN, Hormel HRL,
Sanderson
Farms and Pilgrim’s
Pride PPC,
to name a few, actually grow or raise their own
crops and livestock in addition to preparing and packaging and finally
selling
to distributors like Wal-Mart
WMT, Kroger KR,
Safeway SWY and other stores
for our dining
pleasure.
They produce immense
quantities of food for a
growing population that is demanding more and more proteins like
chicken. To achieve their more than 2 billion pounds
of annual product shipments, Sanderson employs over 10,000 people, 700
independent growers and ships to nearly every state in the U.S. as well
as many
developed foreign nations.
They also have tight
controls and automation
when it comes to their hatcheries, feed mills, processing and
distribution in
an effort to maintain consistency and their products’ “natural”
classification.
Chickens are big
business; there are more
chickens in the world than any other domesticated bird and more
chickens in the
world than there are people.
To keep up with
demand, Sanderson’s most
recent facility addition is a “big-bird” deboning facility in Waco,
Texas that will
process approximately 1,250,000 birds per week; obviously not a “fly by
night”
operation…
Earnings
Comeback
2011 was a fairly tough year as earnings expectations
tumbled for SAFM. FY2012 and FY2013
estimates also dipped in mid 2012 with the sharp rise in commodity
prices
(feed) and a global economy mostly in recession, forcing chicken prices
lower.
Sanderson dealt with
low demand in 2012 by economizing
their business and improving margins.
At their last report,
Sanderson actually reported
a loss of 31 cents per share for the quarter, on revenue of $605.43
million for
the quarter, compared to the consensus estimate of $559.30 million.
The company’s revenue for the quarter was up
15.1% on a year-over-year basis.
Even though the
company missed the Zacks
consensus estimates for a 7 cent loss, the strong revenues and positive
guidance
carried the stock higher.
We’ve seen the
majority of analysts increase their
estimates for the chicken producer. Analysts at BMO
Capital Markets raised their
price target on shares of Sanderson Farms from $42.00 to $51.00 in a
research
note to investors on Thursday, April 11th. They now have a “market
perform”
rating on the stock.
Analysts at Sidoti
and here at Zacks downgraded
shares of Sanderson Farms because of its tremendous run recently and
perhaps a
slightly high valuation at 16 times forward earnings.
Current Zacks
consensus estimates are for 72
cents in the current quarter, $1.59 for next quarter and $4.87 in
FY2013, with expectations
for an 8% increase in year over year sales.
Chickens
and the Future
Sanderson and its peers are no doubt susceptible
to commodity prices, chicken prices and chicken demand.
Late last year, we
saw retail chicken prices
hit all-time highs as producers continued to pass on the effects of
this
summer’s sky-high corn prices. According to the USDA’s retail broiler
composite
price, which measures the price paid for chicken parts and whole birds,
chicken
prices are not only much higher than last year (+17.63%), but stable
and rising.
Mechanically
separated chicken prices are
also higher than last year and appear to be more stable at present.
On the grain front,
we are seeing favorable
conditions for corn planting and according to Peter Meyer of PIRA
Energy Group,
prices could go lower. “Besides
weather, the key for the summer will be the conditions that the seed
was
planted in. For the most part they’ve
been marginal at best. But, that all doesn’t matter with poor demand.
It will take a sub-$4.50 price to really get
demand heated up. But, I’m not so sure we can get there. We
should be able to get down to $5.00 and
then it’s a matter of consumers stepping up. If they don’t, it will
lead to
another leg lower” Meyer noted recently.
With high chicken
prices, low input costs and increased consumer demand, the environment
is almost what you would call
a “chicken trifecta.”
Summary
There is no doubt that Sanderson’s success is
dependent on several moving parts and that the stock has had a
tremendous run,
but if grain conditions are favorable and the U.S. and global economy
stay
stable at the very least, a 16 times valuation with a small 1.10%
dividend is
not a bad price to pay for a stock that is feeding the world’s growing
desire
for low-cost, healthy protein.
We will know more
when the report earnings on
May 21st; perhaps a “leg-in” strategy might be the best solution
here, with a little long now and a little after the report.
Jared
A Levy is one of the most highly sought after traders in the world and
a former
member of three major stock exchanges. That is why you will frequently
see him
appear on Fox Business, CNBC and Bloomberg providing his timely
insights to
other investors. He has written and published two tomes, “Your
Options Handbook” and “The
Bloomberg Visual Guide
to Options”.
You can discover more of his insights and recommendations through his
two
portfolio recommendation services:
Zacks Whisper
Trader– Learn to
buy stocks likely to have robust earnings BEFORE they report.
Zacks TAZR Trader
– Technical Analysis +
Zacks Rank. Best of both worlds approach to find timely trades.
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Jared A Levy on twitter at @jaredalevy
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