Sanderson Farms posted 2Q earnings of $1.33 compared to analyst estimates of just $0.29. Sales were up over 50% on higher volumes and improved chicken prices.
This is a stark contrast to the spring of 2006, when bird flu fears had sharply pressured chicken prices, pushing industry margins into the red. The industry responded by slashing production and idling capacity. Sanderson delayed construction on their new Waco, TX facility, but resumed it earlier this year as chicken prices rebounded.
Despite the solid quarter, shares are off late in the day after being up as much as $3 earlier. Obviously the stock is fighting market headwinds. But shares aren't even getting credit for the $1.04 in unexpected additional book value, much less acknowledgment of improved trends.
We view Sanderson as the premier company in the space. They have a conservative, tight-fisted and honest management team as well as a strong reputation for product quality. While shares aren't as cheap as they were a year ago, we think fair value rests in the low $50's.
Disclosure: We own shares of Sanderson Farms.
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