Ockham Research's  Instablog

Sanderson Farms (SAFM) is one of the premier poultry producing companies in the United States with $1.72 billion in sales last year.  However, as of this week's report we are downgrading Sanderson Farms to Overvalued.  The stock has enjoyed some significant appreciation recently as the stock is up nearly 15% in the last month.  Much of the recent momentum has centered around KeyBanc initiating coverage on Sanderson Farms as well as Tyson Foods (TSN).  The research note was pretty positive indicating that the analyst believe that the poultry business is due for a rebound.  The Keybanc analyst noted lower feed costs and a tendency for consumers to eat a home more often both should be positive for the stock.  Coverage of Sanderson Farms was initiated at a Buy rating, while Tyson was given a Hold.

While this analysis may be correct, we think that Sanderson Farms shares are simply too overbought currently.  The poultry industry may be due for a rebound, but Sanderson Farms is actually trading higher than where it was a year ago, so there is not a huge downside that it would be rebounding from.  With Pilgrim's Pride declaring bankruptcy and Tyson Foods down more than 35% over the last year, Sanderson's largely avoided the difficulty surrounding the industry and its two main competitors in the past year.

Sanderson does have a balance sheet that is worthy of some adulation, and it is gaining market share.  However, it is a far cry from being Undervalued, especially in this market environment where so many companies have been beaten down far worse than Sanderson Farms.  The company is expecting revenue to be flat in the year ahead, and Sanderson recently swung to a loss of 33 cents per share in the first quarter.  Although that was better than some analysts had expected.  At Ockham, we do not like recommending a company that has recently swung to a loss and is not growing revenues.  So, simply stated Sanderson Farms shares are too expensive given the fundamentals supporting them. 

Disclosure: No Positions