Sanderson Farms: Buy Signal Getting Closer
Summary
- Looks on the cheap side.
- Sentiment is ultra pessimistic.
- Grain prices should ease off, which should help this stock rally.
Sanderson Farms (NASDAQ:SAFM) has around 20 days until its upcoming earnings report and it will be interesting to see if the present weekly swing low can hold until then. This stock came across my desk as a potential value play due to its current valuation. The jury is out though on this stock due to its much lower expected earnings this present fiscal year which will end at the end of October. In fiscal 2017, Sanderson Farms reported $12.30 in earnings per share but only $9.71 is predicted this year and a further decline the following year. However given the nature of the external factors that affects the business of Sanderson Farms, consistent earnings have never been the norm.
In fact, in fiscal years 2015 and 2016, earnings per share dropped sharply before rising again in 2017. At first glance, what the company really has going for it is its balance sheet. Equity of $1.43 billion in its most recent fiscal year of $1.43 billion dwarfed the liabilities sum of $327 million. On the contrary, I'm conscious of the downside risk here due to the apparent lack of strong competitive advantages. The price of grain alone or a mere economic downturn can have a huge impact on Sanderson's margins. In fact, we saw how susceptible this stock was to external factors in the great recession of 2008.
In saying this, we may have an attractive long set-up here if risk is controlled and stops are honored. Let's first go through the company's 10 year financials to see if we can spot any trends which could potentially derail a long investment.
We will designate a pass/fail mark to each financial metric depending on whether we have seen meaningful growth for that respective metric over the past decade. As we currently are in mid year, figures are taken off trailing twelve month averages.
| Net Income | $307 million - Pass |
| Debt / Liabilities | 22% - Pass |
| Revenues | $3.426 billion (10-Year Trend Is Up) - Pass |
| Gross Profit Margins | 18.4% - (10-Year Trend Is Up) - Pass |
| Price History of the stock | Up Well over 100% in the last 10 years excluding dividends - Pass |
| Healthy balance sheet | Total assets = $1.76 billion (10-Year Trend Is Up) - Pass |
| Dividends |
|
| Operating Margins | 12% on average annually Over the last decade - Pass |
| Resistant To Recessions? | Stock collapsed in 2009 - Fail |
We can see that (bar the performance of the share price in the great recession) there's nothing in the long-term financials that would illustrate severe headwinds ahead for this company. This is where the valuation comes into play. Currently Sanderson Farms trades with a book multiple of 1.7 and a sales multiple of 0.7. These numbers are well below the industry averages of 2.1 and 1.4 plus they are well behind Sanderson's five-year averages. Fundamentally, Sanderson Farms should continue to take advantage of consumer trends favoring fresh food, including chicken due to its low cost and high nutrition, and which should remain very much at the forefront.
From a technical standpoint, shares look heavily oversold on the long-term chart with both the stochastics and momentum indicators looking extremely depressed. If the weekly swing can hold this week, we should see some upward movement on the 10-day moving average. This will be our signal to buy with a tight stop in place to protect against the downside.
Our portfolio also is long corn and this small position should act as a nice hedge against long Sanderson Farms exposure. Sentiment was dire in corn at the start of the year but the nice run-up in prices over the past four months has boosted sentiment to ultra-optimistic levels. I'm expecting some selling to take place here in corn to work off some of that ultra sentiment we are seeing in that soft commodity at present. Some easing in grain prices should help Sanderson Farms rally off its lows. Suffice to say, we will wait for our buy signal if we get one.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SAFM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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