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SAFM - Sanderson farms Inc


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Just took a position in Sanderson Farms @ $75.60

 

I'm using Twelve Tailing Month data, from AdvFn.

 

About the company

-3rd largest processor of dressed chicken in the US

-1750M market cap

-They have a free cash flow of 463M

-26.4% ROI in terms of FCF / MV.

-17.5% ROI in terms of EPS / Price

-Understandable business model, profits based on commodity price of chicken and soybean meal

-Has anti takeover provisions

-Directors own 5.5% of shares.

-Avian flu H5N2 does not affect humans. Depreciation of chicken producer prices are most likely an overreaction.

 

Financial statements

-I haven't found any questionable accounting policies.

-Revenues are not decreasing

-Accounts receivables not increasing out of ordinary

-positive cash flow from operating

 

Would anyone have something else to add?

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Just took a position in Sanderson Farms @ $75.60

 

I'm using Twelve Tailing Month data, from AdvFn.

 

About the company

-3rd largest processor of dressed chicken in the US

-1750M market cap

-They have a free cash flow of 463M

-26.4% ROI in terms of FCF / MV.

-17.5% ROI in terms of EPS / Price

-Understandable business model, profits based on commodity price of chicken and soybean meal

-Has anti takeover provisions

-Directors own 5.5% of shares.

-Avian flu H5N2 does not affect humans. Depreciation of chicken producer prices are most likely an overreaction.

 

Financial statements

-I haven't found any questionable accounting policies.

-Revenues are not decreasing

-Accounts receivables not increasing out of ordinary

-positive cash flow from operating

 

Would anyone have something else to add?

 

There's a write-up on VIC recommending a short on all the chicken producers. The basic thesis is that the chicken cycle is cyclical, and that when the chicken producers are in oversupply and showing bad metrics on a TTM basis it's a good time to buy and when they are showing good metrics on a TTM basis they are a good short. Have you looked at normalized earnings for all the chicken producers? The author says "Investors frequently value chicken producers at peak valuation multiples on peak earnings at the top of the cycle and at trough valuation multiples on trough earnings at the bottom."

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Just that short chicken is a popular trade among hedge funds at the moment (and more broadly animal protein). I don't follow this industry but understand that the thesis has something to do with being at the top of the cycle. You might want to inquire with more knowledgeable people along those lines.

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Graph out the margins for the last 10 years. It is very cyclical. For some reason this last cycle lasted a little longer than the previous. The market is still very fragmented so one should expect the cyclical nature to remain in the industry.

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Read Foopoly. They have a whole section on the history of chicken processors (from a leftist perspective). The figures are fascinating.

 

They broke down how much of the profit goes to supermarket, processors, chicken raisers. Its a true economies of scale tale.

 

I like Sanderson Farms and Pilgrim Pride. Both are excellent. Id stay away from Tyson.

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Thanks guys. I'll do some more research into the cyclical nature. Perhaps I should look at how Tysen and other chicken producers are doing as well for comparison. I have a position in PPC also and they have 6 idling processing plants. This does sound a little contrary to the peak of the chicken cycle. Anyone know off hand if the other producers have idling plants?

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Thanks guys. I'll do some more research into the cyclical nature. Perhaps I should look at how Tysen and other chicken producers are doing as well for comparison. I have a position in PPC also and they have 6 idling processing plants. This does sound a little contrary to the peak of the chicken cycle. Anyone know off hand if the other producers have idling plants?

 

Isn't idling plants what you expect post peak (too much supply)? I know when Micron was a popular investment for HFs the thesis was based on S&D. For cyclical industries, I think the industry S&D outlook matters a lot more than the financials of any individual company.

 

I found some price history for chicken. Might be worth checking retail v wholesale price differences to get an idea of whether supply is ahead of demand? Or call up Tyson and ask questions about the industry? There has been a 40%-50% increase in wholesale chicken prices since 2010.

 

http://www.nationalchickencouncil.org/about-the-industry/statistics/wholesale-and-retail-prices-for-chicken-beef-and-pork

http://www.indexmundi.com/commodities/?commodity=chicken&months=60

http://finance.yahoo.com/blogs/big-data-download/pricey-poultry-why-chicken-gotten-expensive-183755167.html  (from 2013)

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Hey Schwab, really appreciate the numbers. Those were very helpful. I think it was my inexperience that lead me to not even think to look up chicken prices.

 

I did a few charts in excel and noticed that while chicken prices have been increasing, the difference between (retail - wholesale) has not increased proportionally. This could help to explain why chicken producers are not appearing on the market even though chicken prices have gone up. It may be that the distribution channels are capturing more of the price increases, making it economical to have idle production facilities.

 

And yes, the idle plants would hint at post peak. Think I had a brain fart.

 

David - I'll be checking foopoly when I have time (or was it foodopoly?)

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Hey Schwab, really appreciate the numbers. Those were very helpful. I think it was my inexperience that lead me to not even think to look up chicken prices.

 

I did a few charts in excel and noticed that while chicken prices have been increasing, the difference between (retail - wholesale) has not increased proportionally. This could help to explain why chicken producers are not appearing on the market even though chicken prices have gone up. It may be that the distribution channels are capturing more of the price increases, making it economical to have idle production facilities.

 

And yes, the idle plants would hint at post peak. Think I had a brain fart.

 

David - I'll be checking foopoly when I have time (or was it foodopoly?)

 

Eyeballing the spread looked pretty consistent so I wonder if margins are tightening for retailers? If so, then the consolidation of wholesalers recently may be cushioning some of the over-supply. I wonder if chicken will be less cyclical then in the past?

 

Also, does anyone know if "meat" chickens can be converted to "egg" chickens (assuming they are hens, obviously)? I don't know if this flu effects just eggs or the meat of the chicken as well but you might get a break with this bird flu outbreak.

 

http://www.wsj.com/articles/bird-flu-outbreak-decimates-egg-laying-flocks-1432237046

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does anyone know if "meat" chickens can be converted to "egg" chickens (assuming they are hens, obviously)?

 

no.  different breeds, wouldn't be efficient.

 

but chickens aren't like cattle where there is a huge lag in building up herds, a laying hen can go from a just laid egg to producing eggs in about 6 months.  so, at least in theory, you could get like a 90% reduction in flock size from disease (or whatever) and just 6-7 months later be back up to full capacity.

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No,but it could very much affect your supply of birds.

 

Been thinking about this for a while. I was probably overthinking it because it took too long to come up with this. The upper bound for damage to the company, if every chicken died, is around 212M, which is the value of the inventory in the April 2015 balance sheet. With a market cap of ~1750M right now, this could represent a loss of 12% of MV.

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No,but it could very much affect your supply of birds.

 

Been thinking about this for a while. I was probably overthinking it because it took too long to come up with this. The upper bound for damage to the company, if every chicken died, is around 212M, which is the value of the inventory in the April 2015 balance sheet. With a market cap of ~1750M right now, this could represent a loss of 12% of MV.

I think at that point you're just Big Egg, No Chicken!!! LOL. You will still need to replace that inventory, no?

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I think at that point you're just Big Egg, No Chicken!!! LOL. You will still need to replace that inventory, no?

 

Yes, the chickens will need to be replaced. It's about 3 weeks of incubation, and 5-7 weeks to proper slaughter age. I think that would be the worst case scenario in terms of replacing all chickens. I'd imagine that since this virus is not the first ever virus, precautions are constantly being taken to ensure that there will be eggs available from stocks of healthy chickens that are segregated from contamination.

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  • 1 month later...

Sanderson farms is the third largest poultry producer in the US, With FCF of ~250-300 million dollars, and trades at 1.5B dollars. In the last few years the company has shown high growth, partly in thanks to decreasing feed prices. The company has practically no debt and about 1B in equity which is almost exclusively from retained earnings.

 

More than 90% of the revenue comes from products with "value added"- which means the products are freeze packed, cut etc.

 

Since I'm not from the US, I would like to ask- is there any brand awareness at all? does the Sanderson Farms brand mean anything to you?

 

latest 10k:

http://files.shareholder.com/downloads/ABEA-6BBVPE/485291109x0x803334/C4042D5B-9206-4180-892F-0175134E6517/SAFM_14_Design_FINALweb_PDF.pdf

 

Would love to get some input.

 

 

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Few quarters back, the Sanderson Jr. CEO was asked regarding being takeover target (practically no debt, so more of a leverage buyout) and he positively responded it by saying " if the deal" makes sense for the shareholder than he would go for it...

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Looking at Pilgrim's pride, it seems they also have enjoyed enormous growth it the last few years, and have also reached a very low P/FCF ratio, the question is - is the poultry business really cyclical? Also, why does competition not take prices to marginal cost in the last few years?

 

Reading about the subject, I come across the term "Meat racket", here for example:

http://www.slate.com/articles/life/food/2014/03/meat_racket_excerpt_how_tyson_keeps_chicken_prices_high.html

 

From the article:

"Four companies make 85 percent of America’s beef and 65 percent of its pork. Just three companies make almost half of all chicken. These figures even understate the reach of the modern meat monopoly, which includes companies like Tyson Foods and Cargill Inc. Today’s meat conglomerates control the food system in a way that that old-school companies could only dream of. Companies like Tyson Foods have pioneered a new model of food production that gives them ownership and control over virtually every stage of the business."

 

Here you have the meat council trying to "mythbust" the meat racket, but it doesn't seem very convincing:

http://www.nationalchickencouncil.org/wp-content/uploads/2014/02/Meat-Racket-Myths-2.pdf

 

Perhaps something changed in the last few years that reduced competition- for instance, I see that in 2012 a few producers went bankrupt because of feed prices

http://www.wsj.com/articles/SB10000872396390443749204578048702822285488

 

The market seems to assume prices and profits will go down soon , but it seems to me that even though grain prices have dropped, poultry prices have risen and profits did as well:

 

Poultry 10 year chart:

http://www.indexmundi.com/commodities/?commodity=chicken&months=120

 

Wheat 10 year chart:

http://www.indexmundi.com/commodities/?commodity=wheat&months=120

 

Perhaps there is a "meat racket" the market is not seeing, and perhaps there are profits to be made from it.

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This industry seems to constantly move towards consolidation since there's obviously economies of scale. From the article:

 

"Back in the 1970s, the Department of Justice sued more than 36 poultry companies for conspiring to cut chicken production and keep prices high. Together, those companies controlled about half the chicken market. Today, just three companies control that share of the market."

 

Even if poultry prices fall or grain prices rise, it will only lead to more consolidation, some of it probably done by SAFM with their impressive balance sheet.

 

Since poultry is so cheap compared to beef (about half the cost per pound) there seems to be a wide gap between the cost of production and the price customers are willing to pay.

 

furthermore, Beef prices have skyrocketed in the last 18 months, making the gap between poultry and beef even bigger:

 

http://www.cbc.ca/news/canada/new-brunswick/beef-prices-up-50-over-last-18-months-1.3160421

 

http://www.thestreet.com/story/13225375/1/why-a-mcdonalds-big-mac-could-cost-you-a-lot-more-soon.html

 

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there may be something of an oligopoly in poultry and pork, but i reject the thesis that there is in beef.  beef producers are numerous and mostly small scale.  larger firms don't enter until the feedlot and/or packer stage - but that meat would still come to market regardless.

 

i also would question that foreign meat doesn't compete with the purported oligopoly on price.

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From a VIC writeup

 

"At a high level, trading the chicken cycle is simple.  Go long the chicken names when there is oversupply, chicken companies are losing money, and capacity is beginning to be removed from the industry.  Go short the chicken names when there is undersupply, chicken companies are raking in profits, and capacity is beginning to be added to the industry.  Today, chicken producers are extremely profitable and we see clear signals that a large supply response is on its way that should lead to a massive oversupply of chicken by 2016 if not sooner."

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  • 3 weeks later...

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