The current share price does not reflect fair value for Sanderson Farms (NASDAQ:SAFM). I believe the company has 40%+ upside from current levels and the unlike much of corporate America, current catalysts are to the upside, as input costs (namely feed costs) will decline dramatically in 2009 YOY. I recommend initiating a ¾ position at current levels, going to full position at $25/share.
Sanderson Farms was incorporated in 1955 and is currently the fourth largest poultry processor in the United States. It currently has 8.1 MM head/week of capacity at 9 facilities in Mississippi, Louisiana, Georgia and Texas.
- Input prices falling—Corn is off over 50% from its high. Soybeans as well are down substantially. These falling input costs will result in higher margins.
- Falling supply—Pilgrim’s Pride recently announced Chapter 11 bankruptcy due to a heavy debt burden from an acquisition combined with trading losses caused it to trigger debt convenants. They have already announced that they will reduce production. More broadly, the most recent Georgia Dock data indicates supply running roughly 6% less than last year.
- Management Aligned—Joe Sanderson (current Chairman and CEO owns 5% of the company). I prefer to own companies with large insider ownership
- SAFM operates in commodity sensitive business (both from revenue and cost side). The Company feeds its chicken through soybeans and corn. In 2008, a spike in these input costs caused negative operating margins.
- P/B - Historically, SAFM has traded between 1.2x and 2.5x net book equity. Currently that equates to a range of $25-52/share. As shares are currently near the trough of that range, they appear to be undervalued.
- P/E - Given an expectation of increased margin vs. 2008, I expect the Company to earn $4/share. On this basis, shares are selling for a little over 6x current earnings, even less on a P/FCF basis as the Company plans to spend less than $20mm on capital investment in 2009.
Stock Position: None.