Remember the "original white meat?" Yes, chicken and
more specifically a Zacks Rank #1 stock calledSanderson Farms
might be worth a look as part of your portfolio
Aside from my love for the meat itself, chicken and the
companies that produce them have been on my radar for some
time. In 2011 I did quite a bit of research into the
chicken industry titans such as Tyson, Pilgrim's Pride and
today's bull, Sanderson Farms. I have mentioned Sanderson
as a favorite on Fox Business several times, including
just ahead of the New Year (chicken comments start around
Chicken producers including Sanderson went on a tear from late
2011 into mid 2012 and then took at bit of a beating late last
year due to skyrocketing feed costs, plummeting chicken prices
and reduced consumption.
Sanderson has resumed its bullish run over the last 6 months
and despite the fact that shares are up nearly 40% since late
December, Sanderson continues to prove why it still should be
part of your portfolio.
Companies likeTyson Foods
,Sanderson Farms andPilgrim's Pride
, to name a few, actually grow or raise their own crops and
livestock in addition to preparing and packaging and finally
selling to distributors likeWal-Mart
and other stores for our dining pleasure.
They produce immense quantities of food for a growing
population that is demanding more and more proteins like
chicken. To achieve their more than 2 billion pounds of
annual product shipments, Sanderson employs over 10,000 people,
700 independent growers and ships to nearly every state in the
U.S. as well as many developed foreign nations.
They also have tight controls and automation when it comes to
their hatcheries, feed mills, processing and distribution in an
effort to maintain consistency and their products' "natural"
Chickens are big business; there are more chickens in the
world than any other domesticated bird and more chickens in the
world than there are people.
To keep up with demand, Sanderson's most recent facility
addition is a "big-bird" deboning facility in Waco, Texas that
will process approximately 1,250,000 birds per week; obviously
not a "fly by night" operation…
2011 was a fairly tough year as earnings expectations tumbled for
SAFM. FY2012 and FY2013 estimates also dipped in mid 2012
with the sharp rise in commodity prices (feed) and a global
economy mostly in recession, forcing chicken prices lower.
Sanderson dealt with low demand in 2012 by economizing their
business and improving margins.
At their last report, Sanderson actually reported a loss of 31
cents per share for the quarter, on revenue of $605.43 million
for the quarter, compared to the consensus estimate of $559.30
million. The company's revenue for the quarter was up
15.1% on a year-over-year basis.
Even though the company missed the Zacks consensus estimates
for a 7 cent loss, the strong revenues and positive guidance
carried the stock higher.
We've seen the majority of analysts increase their estimates
for the chicken producer. Analysts at BMO Capital
Markets raised their price target on shares of Sanderson Farms
from $42.00 to $51.00 in a research note to investors on
Thursday, April 11th. They now have a "market perform" rating on
Analysts at Sidoti and here at Zacks downgraded shares of
Sanderson Farms because of its tremendous run recently and
perhaps a slightly high valuation at 16 times forward
Current Zacks consensus estimates are for 72 cents in the
current quarter, $1.59 for next quarter and $4.87 in FY2013, with
expectations for an 8% increase in year over year sales.
Chickens and the Future
Sanderson and its peers are no doubt susceptible to commodity
prices, chicken prices and chicken demand.
Late last year, we saw retail chicken prices hit all-time
highs as producers continued to pass on the effects of this
summer's sky-high corn prices. According to the USDA's retail
broiler composite price, which measures the price paid for
chicken parts and whole birds, chicken prices are not only much
higher than last year (+17.63%), but stable and rising.
Mechanically separated chicken prices are also higher than
last year and appear to be more stable at present.
On the grain front, we are seeing favorable conditions for
corn planting and according to Peter Meyer of PIRA Energy Group,
prices could go lower. "Besides weather, the key for the
summer will be the conditions that the seed was planted in.
For the most part they've been marginal at best. But, that all
doesn't matter with poor demand. It will take a sub-$4.50
price to really get demand heated up. But, I'm not so sure we can
get there. We should be able to get down to $5.00 and then
it's a matter of consumers stepping up. If they don't, it will
lead to another leg lower" Meyer noted recently.
With high chicken prices, low input costs and increased
consumer demand, the environment is almost what you would call a
There is no doubt that Sanderson's success is dependent on
several moving parts and that the stock has had a tremendous run,
but if grain conditions are favorable and the U.S. and global
economy stay stable at the very least, a 16 times valuation with
a small 1.10% dividend is not a bad price to pay for a stock that
is feeding the world's growing desire for low-cost, healthy
We will know more when the report earnings on May 21st;
perhaps a "leg-in" strategy might be the best solution here, with
a little long now and a little after the report.
Jared A Levy is one of the most highly sought after traders in
the world and a former member of three major stock exchanges.
That is why you will frequently see him appear on Fox Business,
CNBC and Bloomberg providing his timely insights to other
investors. He has written and published two tomes,
"Your Options Handbook"
"The Bloomberg Visual Guide to Options"
. You can discover more of his insights and recommendations
through his two portfolio recommendation services:
- Learn to buy stocks likely to have robust earnings BEFORE they
- Technical Analysis + Zacks Rank. Best of both worlds approach
to find timely trades.
Follow Jared A Levy on twitter at @jaredalevy
Like Jared A Levy on
HORMEL FOODS CP (HRL): Free Stock Analysis
KROGER CO (KR): Free Stock Analysis Report
PILGRIMS PRIDE (PPC): Free Stock Analysis
SANDERSON FARMS (SAFM): Free Stock Analysis
SAFEWAY INC (SWY): Free Stock Analysis Report
TYSON FOODS A (TSN): Free Stock Analysis
WAL-MART STORES (WMT): Free Stock Analysis
To read this article on Zacks.com click here.