When the Ebola virus took US equities by storm, I
recommended buying stocks like Delta, Southwest Airlines, Disney and many
others because they all sold off sharply on fears that everyone in the world
would just stop flying and traveling to Disney World. Those turned out to be
great buys and the Ebola virus is a thing of the past. Now, the newest craze
just hit the poultry market in the form of the Bird flu. On Wednesday, the US
Department of Agriculture confirmed that turkey flocks in Missouri and Arkansas
had been infected with the H5N2 avian flu, which resulted in every single meat
processor selling off sharply. Just like during the Ebola crisis sending
everything travel related lower, not all meat processors are created equal.
That brings me to one stock that sold off on the news, however I believe it
just got caught up in the craze; Sanderson Farms (SAFM).
Sanderson Farms is the third largest poultry producers,
whose products are sold nationally and includes everything from frozen chicken
breasts to drumsticks to whole chickens. What attracted me to this company is
that despite the avian flu outbreak hitting meat processors, Pilgrams Pride and
Tyson, Sanderson Farms CEO, Joe Sanderson, came out on Thursday and ensured
investors that none of its flocks had been affected. He also went on to remind
of its poultry producers and employees that the Sanderson Farms adheres to a
strict biosecurity program. While there is no doubt that the news of avian flu
will temporarily slow down sales, especially exports to China, I think it will
be very short-lived, and the best of breed, like Sanderson Farms, will recover
quickly.
Back on February 25th, Sanderson Farms reported
very strong Q1 numbers, with earnings up 140% to $2.87/share, beating the
street by $0.11/share. Management said that the strong results were attributed
to increased global demand, higher poultry prices and continuously low grain
costs. The company also exceeded top-line estimates with revenues increasing
14% YoY to $667.4M and maintains its outstanding balance sheet with $173.1M in
cash and only $10M in debt.
Sanderson Farms takes the Chipotle approach working with 800
local farmers across the country, all of which are an integral part of their
communities. All of their birds
are in their natural habitat and their farmers adhere to a cage-free,
climate-controlled environment, keeping predators and disease away. The
important thing to note is that Sanderson uses 100% natural chickens, meaning
that all you get is chicken. With more and more American’s focused on all natural
products, this is a huge advantage for Sanderson compared to some of its
competitors who add salt and broth, making Sanderson’s poultry a lot
healthier.
Sanderson is cheap, trading at just 10x future earnings,
compared, slightly less than Pilgram’s Pride and in-line with Tyson Foods.
Unlike Pilgram’s Pride, Sanderson pays a 1.10% dividend with a payout ratio of
just 11%, meaning the company has a lot of room to give additional money back
to shareholders. Of the big three, Sanderson has the highest operating margins
of 14% and its gross margins almost triple those of Tyson.
One thing these companies do have in common is the risks of
the business. Outside of the risk of avian flu, which is affecting Tyson and
Pilgram’s Pride farms, there is also input cost risks. Right now, all of these
producers are benefiting from multi-years lows in chicken feed, which could go
up as feed demand rises. But for now, there is an over supply of feed and input
costs should remain low. The other thing that all three of these companies have
in common, is there is a huge amount of short interest, with Sanderson Farms
having almost 48% of its shares sold short. I actually like that fact because
with stocks like this, one piece of good news will squeeze the shorts and send
the stock soaring. I also see a lot of negative news about avian flu already
priced into these stocks, and as I mentioned before, these news stories are
usually just temporary drops, which correct themselves over time.
If you are looking for a stock in the food industry and don’t
want to pay up for restaurant stocks that are at all-time highs, now is a great
time to own Sanderson Farms. For full disclosure, I did add Sanderson Farms to
my portfolio on Friday. Along with that, I also began building a position in
Apple, as I think the Apple Watch sell-off is done. I will be looking to add
more if the stock drops to $118.
My current positions: Long
Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Google (GOOGL),
Facebook (FB), Delta Airlines (DAL), Whole Foods (WFM), Wells Fargo (WFC),
General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner
(TWX), Palo Alto Networks (PANW), Twitter (TWTR), NXP Semiconductors (NXPI),
Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), Mobileye
(MBLY), Jack In The Box (JACK), Under Armour (UA), Masco (MAS), United Rentals
(URI), Regeneron (REGN), Restoration Hardware (RH), Apple (AAPL), and Sanderson
Farms (SAFM).
Jeff Lewison
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