The STRIDE Blog

Finger Lickin' Value down at Sanderson Farms

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  • Founded in 1947 - now the 3rd largest poultry producer in the USA
  • Operating Income Growth in 2014 of 85.69% (14.89% on a TTM basis in Q1 2015)
  • Almost debt free - with only $20 million outstanding to pay down
  • Tangible book value has grown in 2014 by 33.24% to $40.01 (7.09% on a TTM basis to $42.85 in Q1 2015)
  • Regular dividend has grown in 2014 by 15.49% to $0.82 (management have announced a 7.32% increase for 2015 to $0.88 )
  • Special dividend of $0.50 being paid currently which take the combined yield to 1.77% at the current price.
  • Management have benefited from stable chicken prices and falling feed prices.
  • The share price is marginally up from to its 52 week low of $74.95
  • This value stock pays a dividend and holds good long term returns for the patient investor

Sanderson Farms (NASDAQ: SAFM) released it's Q1 results on the 24th Feb 2015. The quarter on quarter growth in operating income is a heady 128% - however if you look at the TTM picture it shows a more moderate 14.89%. Management are forecasting growth in volume of 11% in 2015 and 10% in 2016. 

The management team have a 4 point strategy 

1. Focus on efficiency 
2. Maintain a favourable product mix
3. Use both point 1 and 2 to drive above industry growth
3. Keep a strong balance sheet

To quote the CEO - "We recognise that there are many things about our business over which we have no control. However, we can control the efficiency with which we operate, and the number of pounds we have to leverage into the market."

SandersonFarms-GrowthQ1

 

SandersonFarms-ForecastGrowth

At STRIDE we estimate that the business will keep enjoying a growth rate of about 10%. This is based on their historical growth compared to our forecasts which recognises Sanderson Farms very focussed and disciplined capital spending. 

Shareholder value creation

Sanderson Farms are very conservatively financed. They are proud to announce in their last annual report that the total debt of the business is now $20 million. All future CAPEX should be financed from operating cash flows. 

The 1.77% dividend yield is a bit low but does allow investors to enjoy some income.

STRIDE Scores

STRIDE scores for the business are looking good. For more info on how the scores work, take a look at the scores and ratings video.

SandersonFarms-Scores

 

The strength rating is 94 and we can see that the Z-score reflects the safety and relative strength of this business. Liquidity and solvency ratios are all fantastic and the business is prudently run with a current ratio of 3.73 as at 31st Jan 2015.

SandersonFarms-NetWorkingCapital

The timing rating of 41 shows that the business has traded down slightly but has been pretty flat.

The returns score is 73 and we can see that this is reflected in the Greenblatt rank / Magic Formula investing position. Returns across the business are good and rising:

SandersonFarms-Ratios

The intrinsic value score of 69 is good - True Book Value per share of $ 42.85

The dividend score is 50 - which is on the low side. The dividend is stable, growing, affordable and financed from free cash. The payout ratio is a bit low at 10%.

Earnings predictability is 100 - our highest rating - the business has recovered well from its poor 2011 results. It has continued to grow the revenue along with the gross and net profit at an income statement and per-share level.

STRIDE Valuation

Our fair value comes in at ~$166. Despite stellar results in 2014 and a strong start in 2015 - the shares have traded sideways.  This is a business that seems unloved by the market (PE Ratio of 6.29) even though it produces stable growing profits. As stated previously our forecast growth number is just over 10%. The management team have reiterated their intentions to keep the business growing and rewarding its shareholders.  We consider the current price to be below our required entry point of $135 - a 19% discount to our fair value of $166.  This would give us a decent margin of safety. The consider sell price is dictated by our RISE factor - more on this in our detailed analysis video.

SandersonFarms-Graph

 

STRIDE Financials

Income statement show revenues, gross profit and net income have been growing as depicted below. 

SandersonFarms-IncomeStatements

The balance sheet is stable and growing. It is very clear that the management team are very keen to keep the business conservatively financed.

SandersonFarms-BalanceSheet

The cash flow is growing and the company is using this growth to invest in new plants.

SandersonFarms-CashFlow

Conclusion

Sanderson Farms is a cyclical business that trades in a very competitive market. Both its output and input costs are dictated by markets forces and the management team are very aware of this. However with the economic expansion in the USA starting to feed into peoples wallets (along with the reduction in energy prices) this is a business that stands to grow rapidly as people start eating better. This is already showing in the revenue numbers both in terms of quantity but also price achieved. For now the input costs look to be stable. 

Sanderson Farms is on our watchlist due to our timing score. For more info on how the timing scores work, take a look at the scores and ratings video. We are watching the shares very closely to see a good entry point when the engine sees the price rising consistently towards the consider buy price.

Interested in reading more of our company evaluations? Click here.

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Topics: Valuation

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