In Poultry, Sadia Hasn't Flown the Coop

 |  Includes: PPC, sda-old, TSN
by: Semi-Standard Deviation

It seems like a short period ago, we were hearing frequent news reports about bird flu reaching another country, a spitting image of the mad cow disease scare, with everybody on high alert.

Chicken processor sales took a decent hit from the bird flu scare, but have recovered since. The worries for bird flu have quieted down a bit now and while a relapse will damage the stock, Sadia S.A.'s (NYSE:sda-old) price appears to be at an attractive valuation for a company posting a strong quarter.

With share price of $33 and a P/E of 12, Sadia trades at a discount to the industry (Fish/Livestock) P/E of 16. It is a small cap (2.25B), Brazil based company with ADRs trading on the NYSE at an average volume of 87,000. The company consistently pays a dividend, the most recent of which came in at 3%.

Their '06 operating revenue was down 4.7% and net income fell even further, down 42%. Prices of processed products in the domestic market and chicken products in the export market were both up significantly and devaluation of the dollar hurt exports. Here is a breakdown of Sadia's products, as a percentage of revenue:


Despite the drop in 2006 numbers, they posted a strong 4Q06 and are in a better position than competitors of the same vein, Tyson (NYSE:TSN) and Pilgrim's Pride (NASDAQ:PPC), both of which delivered losses in the last year. 4Q revenues grew in both their domestic and export markets, with pork and beef leading at home and abroad, respectively.

Looking abroad, Sadia has solid footing across the globe, with 26% of exports going to Europe, 23% to the Middle East, 21% to Eurasia. The Americas bring in 15% of Sadia's exports. The company is the processed food/livestock play in Brazil, as they rank #1 in 6 categories - frozen processed foods, refrigerated processed foods, margarine, chicken, turkey, and pork. They are looking at increase of domestic growth of 8-10% and external market growth of 9-11%.
At home, growth in consumer spending will provide increased revenues for Sadia. The South American markets showed resiliency with Venezuela's nationalization efforts, a strong sign for economic stability. The major concerns center around the valuation of the Real, which has been strong, and on a potential increase in inflation rates, which are sitting at a very reasonable 3%. For growth abroad, they are looking at expansion in the Middle East, specifically Egypt, as its curtailing of domestic poultry has provided room for importers to come in. Also, Sadia has partnered up with McDonald's (NYSE:MCD) Russian stores to provide chicken, which will help offset their losses due to Russian pork regulation.

In conclusion, Sadia has an attractive P/E, a five year ROE avg of 29% and strong 4Q results in a tough year. An attractive dividend yield provides the icing on the cake. Concerns linger about another avian flu outbreak, as well as debt on the balance sheet, but for investors looking to get into a strong, expanding Brazilian company at a reasonable price, Sadia will provide the entry point.

SDA 1-yr chart

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