Sanderson Farms' Prayers Were Answered

When I last commented on Sanderson Farms (SAFM) in August 2008, their CEO Joe Sanderson was praying for a miracle.

Well that’s going to take a miracle and an angel or something looks to me. (Conference call August 2008)

His company was being pummeled by high feed prices. In the call, he implied weaker competitors would go bust and they did (Pilgrim's Pride (PGPDQ.PK)).

Well, Mr. Sanderson's prayers have been answered. Corn has come down to $3.67 from over $7.00. SAFM made $2.09 last quarter. SAFM came out of the disaster stronger than ever. Look at its peers: Pilgrim's Pride filed bankruptcy, Tyson's (TSN) and Smithfield (SFD) are struggling and are nowhere near profitable.

SAFM was wise about its finances. Last quarter, SAFM paid down $67 million of debt on top of a previous $45 million paid the earlier quarter. Debt now stands at $133 million. Over the last 6 months, SAFM has brought its debt/equity ratio from 0.71 to 0.32 without resorting to secondary offerings; it paid down its debt the old-fashioned way using profits (who does that anymore??).

SAFM just raised its dividend from 14 to 15 cents and announced a 1 million share buy back.

Currently the stock trades at a PE of 78. That lofty PE reflects a -$2.56 loss Q4 2008. Next quarter, consensus is $1.07. Then the -$2.56 goes off, the $1.07 comes on, which should readjust the PE to a more salable 8.9. SAFM is a strong turnaround story showing that, indeed, good management and miracles do pay off.

Caveats: chicken prices have been heading lower and corn feed creeping up. This creates a drag on their earnings. However, the big clean-up in their balance sheet makes this an excellent long term holding in the food sector.

The last 3 quarters, SAFM has surprised street analyst consensus. This time set to earn $1.04 consensus. I expect them to beat that estimate handily.

DIsclosure: Long SAFM

Comments

[Tom Armistead:]

I don't know if SAFM has changed their procedures, but when I owned the shares they didn't hedge feed prices, something I felt saved them money over the long term but can result in very uneven results.

I like the company but with the way earnings fluctuate I would look at 5 or 6 year average EPS and try to pay well less than 15 X that metric.

I get 2.38 for 6 year average EPS, with the best year occurring in 2004, 4.57. So 12 X 2.38 = 28. At 37.71 it seems over-priced.

Nov 05 07:09 AM