Sanderson Farms: A Tough 2019, But Optimistic For 2020

Summary

• Sanderson Farms currently is trading at 70 times its FY 2019 profit.
• The market already is anticipating a substantial improvement of the company's financial performance in the current financial year as the outlook is improving.
• This doesn't mean Sanderson Farms is still cheap, and the outlook beyond FY 2020 remains volatile.
• The higher volatility results in higher option premiums and writing out of the money put options might be the best strategy here.
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Introduction

Sanderson Farms (SAFM) had an excellent 2019 as its share price will end the year approximately 80% higher than where it started on Jan. 1. An excellent achievement, especially considering the negative impact of the higher corn prices in the final quarter of its financial year, caused by late harvests. 2018 was a weak year, 2019 was slightly better, but Sanderson Farms appears to be quite optimistic for the current financial year and beyond as it expects its EBIT and EBITDA to show a substantial increase.

2019 was a better year than 2018

It was a relatively weak fourth quarter where Sanderson Farms saw the market price for boneless breast meat for food service customers (requiring a big bird) decrease to historically low levels after Labor Day. This means the trend in 2019 was similar to 2018 when Sanderson also had to deal with a weak fourth quarter. Fortunately this was just a temporary issue as poultry prices started to increase again in November and December and Sanderson appears to be relatively optimistic about the start of the current financial year.

Source: financial statements

Back to FY 2019. Sanderson Farms reported revenue of $3.44B, an increase of just more than 6% compared to FY 2018, but unfortunately the cost of sales also increased by a similar percentage. However, the SG&A expenses fell by almost 5% and that saved the day as that kept the total increase of the operating expenses limited to just 5%. And the difference between a 6% revenue increase and a 5% increase of the operating expenses had a huge impact on the operating income of this low-margin business as the operating income more than doubled to just short of $68M.

Unfortunately the interest expenses increased, but Sanderson Farms was still able to report a pre-tax profit

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.