Monday, December 05, 2005

Sanderson Farms (SAFM)

One of today’s brokerage downgrades was Sanderson Farms, Inc (SAFM) resulting in about a 7% drop in the stock.

Though chicken processing is hardly an exciting business, historically, this has been a very exciting business.

Revenue growth in the last 3 years has compound growth of over 14% versus the S&P 500’s 10%. E.P.S. growth in the same time frame has averaged almost 50%, more than twice that of the S&P 500.

Return on invested capital in fiscal year 2004 was over 35%. Cash flow from operations for the year to date is almost $90 million, essentially flat with last year’s CFFO. The company has a long history of free cash flow generation, This year, the business is not generating free cash flow due to the $133.6 million fiscal 2005 capital budget which includes approximately $7.2 million in operating leases, $13.0 million for the construction of a new corporate office building, and $88.5 million on a new poultry complex in South Georgia which began operations on August 22, 2005. Maintenance capex is generally only around $25 million. Long term debt to capital is a tiny 2%.

The stock is down roughly 25% for YTD, but is currently trading at only about 3.5 times Enterprise Value to EBITDA ratio.

The company has a long history of being shareholder friendly…dividend growth over the last five years has been 44%. The company has not bought back stock historically.

Chicken prices have fallen this year both domestically and internationally. Input costs have risen as well. Whether it is avian flu fears that have affected chicken demand or some other rationale, it is difficult to perceive this as a long term problem.

I believe the stock is very cheap.


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