Rating Update: Stock Rating C-Neutral (5/16/19)-Sanderson Farms Inc (SAFM).

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BUSINESS

Sanderson Farms, Inc., an integrated poultry processing company, produces, processes, markets, and distributes fresh, frozen, and prepared chicken products in the United States. The company sells ice pack, chill pack, bulk pack, and frozen chicken in whole, cut-up, and boneless form primarily under the Sanderson Farms brand name to retailers, distributors, and casual dining operators in the southeastern, southwestern, northeastern, and western United States, as well as to customers who resell frozen chicken in the export markets. Its prepared chicken product line includes institutional and consumer packaged partially cooked or marinated chicken items for distributors and food service establishments. Sanderson Farms, Inc. was founded in 1947 and is headquartered in Laurel, Mississippi.
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INVESTMENT RATING

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SAFM is expected to be Value Creation neutral reflecting capital returns that are forecasted to be in line with the cost of capital.

Sanderson Farms has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Sanderson Farms has a very low Appreciation Score of 9 but a very high Power Rating of 100, resulting in the Neutral Value Trend Rating.

Sanderson Farms’ stock is selling significantly above targeted value. The current stock price of $152.10 compares to targeted value 12 months forward of $59.
Sanderson Farms’ very low appreciation potential results in an appreciation score of 9 (91% of the universe has greater appreciation potential.)
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Sanderson Farms has a Power Rating of 100. (This very high Power Rating indicates that SAFM has a better chance of achieving attractive investment performance over the near to intermediate term than all but 0% of companies in the universe.)
Factors contributing to this very high Power Rating include: the recent trend in SAFM’s earnings estimates has been extremely favorable; is in an extremely strong phase current; and recent price action has been extremely favorable.

INVESTMENT PROFILE

SAFM’s financial strength is above average. Financial strength rating is 70.
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Relative to the S&P 500 Composite, Sanderson Farms Inc has moderate Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that SAFM is normal risk. Low financial leverage is a positive for SAFM. Relative weaknesses include: low forecasted profitability, low expected growth, and low historical growth. SAFM’s valuation is high: low dividend yield, high P/E ratio, and moderate price/book ratio. SAFM has unusually low market capitalization.

CURRENT SIGNALS

Sanderson Farms’ current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.

Sanderson Farms’ current technical position is very strong. The stock price is in a 4.7 month up move. The stock has appreciated 57.9% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Sanderson Farms Inc (NASDAQ: SAFM) has recently experienced slight negative changes in fundamentals: significant quarterly earnings deceleration occurred.
The stock is currently rated C.
Sanderson Farms Inc (NASDAQ: SAFM) stock suffered a major decline of -16.1% on 5/16/19. The shares closed at $1.04. Trading volume in this decline was normal. The stock has been exceptionally strong relative to the market over the last nine months but is unchanged during the last week.

CASH FLOW

In 2018, Sanderson Farms experienced a very significant reduction in cash of -$298.1 million (-71%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$150.2 million. Non-operating uses consumed -$6.7 million (-4% of EBITDA). Cash taxes contributed +$1.8 million (+1% of EBITDA). Re-investment in the business amounted to -$334.9 million (-223% of EBITDA). On a net basis, debt investors withdrew -$2.1 million (-1% of EBITDA) while equity investors pulled out -$106.4 million (-71% of EBITDA).
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Sanderson Farms’ Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Sanderson Farms Inc Peer Group. In most years, Sanderson Farms was in the second quartile and top quartile. Currently, Sanderson Farms is lower quartile at -4% of EBITDA (-$6.7 million).

Sanderson Farms’ Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Sanderson Farms Inc Peer Group. In most years, Sanderson Farms was in the second quartile and top quartile. Currently, Sanderson Farms is upper quartile at +1% of EBITDA (+$1.8 million).

Sanderson Farms’ Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Sanderson Farms Inc Peer Group. In most years, Sanderson Farms was in the top quartile and lower quartile. Currently, Sanderson Farms is lower quartile at -223% of EBITDA (-$334.9 million).

Sanderson Farms’ Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Sanderson Farms Inc Peer Group. In most years, Sanderson Farms was in the third quartile and lower quartile. Currently, Sanderson Farms is substantially below median at -1% of EBITDA (-$2.1 million).

Sanderson Farms’ Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Sanderson Farms Inc Peer Group. In most years, Sanderson Farms was in the top quartile. Currently, Sanderson Farms is lower quartile at -71% of EBITDA (-$106.4 million).

Sanderson Farms’ Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Sanderson Farms Inc Peer Group. In most years, Sanderson Farms was in the top quartile and second quartile. Currently, Sanderson Farms is lower quartile at -198% of EBITDA (-$298.1 million).
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Sanderson Farms’ Cash, %Revenue has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Sanderson Farms Inc Peer Group. In most years, Sanderson Farms was in the second quartile and lower quartile. Currently, Sanderson Farms is below median at +4%.

PROFITABILITY

Sanderson Farms’ return on equity has eroded very significantly since 2009 accelerating very sharply after the 2017 level.
This very significant erosion was due to very strong negative trend in pretax operating return and strong positive trend in non-operating factors.
The productivity of Sanderson Farms’ assets declined over the full period 2009-2019: asset turnover has suffered a strong overall downtrend.
Reinforcing this trend, pretax margin experienced a strong overall downtrend that accelerated very sharply from the 2017 level.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
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Sanderson Farms’ return on equity is lower quartile (-0.6%) for the four quarters ended January, 2019.
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Operating performance (pretax return on assets) is lower quartile (-0.6%) reflecting asset turnover that is at median (1.90X) and lower quartile pretax margin (-0.3%).
Tax “keep” rate (income tax management) is at the lower quartile (71.3%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at the lower quartile (1.24X).

GROWTH RATES

There are no significant differences between Sanderson Farms’ longer term growth and growth in recent years.
Sanderson Farms’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 6.1% per year.

Total asset growth has been 9.7% per year.

Annual E.P.S. growth has been 1.7% per year.

Equity growth has been 13.0% per year.
No consensus growth rate forecast is available for Sanderson Farms.
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Relative to the Sanderson Farms Inc Peer Group, Sanderson Farms’ historical growth measures are erratic. Equity growth (13.0%) has been upper quartile. Total asset growth (9.7%) has been at the upper quartile. Revenue growth (6.1%) has been slightly below median. E.P.S. growth (1.7%) has been at the lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Sanderson Farms’ stock price performance has been variable and superior. Between July, 2008 and May, 2019, Sanderson Farms’ stock price rose +283%; relative to the market, this was a +69% gain. Significant price moves during the period: 1) September, 2015 – November, 2017: +147%; and 2) July, 2012 – June, 2014: +164%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 37.6% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through April, 2019 of 37.6% is upper quartile relative to Sanderson Farms Inc Peer Group.

Current 5-year total return performance of 14.9% is above median relative to the S&P 500 Composite.
Through April, 2019, with above median current 5-year total return of 14.9% relative to S&P 500 Composite, Sanderson Farms’ total return performance is upper quartile relative to Sanderson Farms Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, SAFM’s overall valuation is high. The highest factor, the ratio of enterprise value/assets, is above median. Price/equity ratio is below median. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.

Relative to Sanderson Farms Inc Peer Group, SAFM’s overall valuation is high. The highest factor, the ratio of enterprise value/assets, is at median. Price/equity ratio is at median. Ratio of enterprise value/revenue is slightly below median. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Sanderson Farms has a minor value gap compared to the median valuation. For SAFM to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.05X to 1.13X. If SAFM’s ratio of enterprise value/revenue were to rise to 1.13X, its stock price would be lower by $12 to $164.
For SAFM to hit lower quartile valuation relative to the Sanderson Farms Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.05X to 0.68X. If SAFM’s ratio of enterprise value/revenue were to fall to 0.68X, its stock price would decline by $-53 from the current level of $152.

VALUE TARGETS

SAFM is expected to be Value Creation neutral reflecting capital returns that are forecasted to be in line with the cost of capital.
Sanderson Farms’ current Price Target of $61 represents a -60% change from the current price of $152.10.
Sanderson Farms’ very low appreciation potential results in an appreciation score of 9 (91% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 9, the high Power Rating of 100 results in an Value Trend Rating of C.
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Sanderson Farms’ current Price Target is $61 (+11% from the 2018 Target of $55 but -60% from the 05/16/19 price of $152.10). This slight rise in the Target is the result of a +7% increase in the equity base and a +4% increase in the price/equity multiple. None of the Value Drivers has an impact on the price/equity multiple. The forecasted increase in growth has no impact on the multiple. The forecasted decline in cost of equity also has no impact and the increase in return on equity didn’t either.
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PTR’s return on equity forecast is 6.1% — slightly above our recent forecasts. Forecasted return on equity exhibited a modest, erratic decline between 2010 and 2018. The current forecast is significantly below the 2014 peak of 24%.

PTR’s growth forecast is 15.0% — slightly above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is well above the 2013 low of 6%.

PTR’s cost of equity forecast is 6.4% — in line with recent levels. Forecasted cost of equity erratic but little changed between 2010 and 2018. The current forecast is below the 2014 peak of 10.6%.
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At Sanderson Farms’ current price of $152.10, investors are placing a positive value of $427 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 11.0% per year, and a return on equity of 4.0% versus a cost of equity of 6.9%.
PTR’s 2020 Price Target of $61 is based on these forecasts and reflects an estimated value of existing assets of $139 and a value of future investments of $-78.

About John Lafferty 35825 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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