For Sanderson Farms, Chicken Cycle Has Been Strong But Is Likely To Regress

D.A. Davidson’s Eric M. Gottlieb believes the current valuation of Sanderson Farms, Inc. SAFM does not offer meaningful appreciation potential, given that the market has already accounted for near-term expectations for organic growth, while the earnings cycle is either close to or has passed its peak.

Gottlieb initiated coverage of the company with a Neutral rating and price target of $103.

Robust Business

The analyst mentioned that Sanderson Farms’ business plan was simple and robust, and the company continues to build its plan network and grow organically, being one of the few domestic player adding new facilities.

“The company is increasing production capacity and instituting cap ex investments, while carrying little or no debt,” Gottlieb stated.

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Product Mix

Sanderson Farms’ product mix is also favorable, with the new chicken processing facilities focused on the higher margin big bird deboning market.

In FY16, the company had 58 percent production in big bird deboning and 42 percent in tray pack, without any small bird production.

“The balance sheet remains strong and debt free, which serves as an avenue to support the growth, as well as a backstop during industry downturns,” the analyst noted.

Strong Cycle Likely To Regress

Gottlieb pointed out that the chicken industry has been going through a strong cycle, with several consecutive years of robust profitability, which the company has benefited from.

However, the cycle is likely to regress going forward, with grain costs being a potential moderate headwind.

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