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 principally in the southeastern, southwestern, northeastern and western U.S., and to U.S.-based customers who resell frozen chicken into export markets.
During its fiscal year ended Oct. 31, 2010 the company processed 405.0 million chickens, or approximately 2.57 billion dressed pounds.
Financial information presented herein, is based on the company's most recent SEC Form 10-K filing for year ending Oct. 31, 2010, as filed with the Securities and Exchange Commission on Dec. 14, 2010.
Short-Term Investment Valuation
The stock closed recently at $40.34, with first resistance at $44.50, a 10% increase from the recent close, and second resistance at $44.86, an 11% increase from the recent close. Should the stock price breakout above second resistance, the next resistance level is $49.47, a 23% increase from the recent close.
The stock should find support at $38.177, a 5% decline from the recent close.
Earnings Growth Valuation
Earnings growth valuations are based on the spread between year over year earnings growth and the current P/E.
In the case of Sanderson Farms Inc., the company had a year over year earnings growth of 53%, ending FY10 with earnings of $8.45 per share.
With a trailing twelve month P/E currently at 5, the spread between earnings growth and the P/E is 11.4, meaning that for an investor focusing on earnings growth, the stock should be trading at $136.47, a $96.13 increase from a recent close.
Fundamental Investment Valuation
Liquidity: The company ended FY10 with a current ratio of 3.23, a quick ratio of 1.55, a cash ratio of 0.69, and a cash conversion cycle of 42 days. In addition, with goodwill and intangibles comprising 0.0% of total assets, and the company ended the year with a book value of $29.22 and a tangible book value of $29.22.
Profitability: FY10 found the company with a gross margin of 18%, an operating margin of 13.5%, a net operation margin after taxes (NOPAT) of 9.7%, a return on invested capital (ROIC) of 28%, and an effective tax rate of 35%.
Debt: The company ended FY10 with total debt of $65.2 million, a year over year decrease of 43%. Additionally, the company paid an average annual interest rate 4.14%, a year over year decrease of 4.3%, had a debt to cash ratio of 0.89, and a debt to equity ratio of 0.10.
Cash Flow: The company's FY10 operating cash flow was $10.58 per share, a year over year increase of 19%. The company also ended FY10 with free cash flow of $3.39 per share, a year over year decrease of 52%.
Dividends: During FY10 the company paid a $0.63 per share dividend, a 9% year over year decline.
Fundamental Valuation: Based on our review of the company's latest annual financial information we think a reasonable value estimate for the company is in the $67-$72 range.
Considering a Recent Close of $40.34, an estimated Merger and Acquisition payback of 3.5 years (assuming EBITDA remains the same), and year over year earnings growth of 53%, we think on a fundamental investment basis, the stock is currently under priced, and a candidate for additional research for the Wax Ink Portfolio.
We have no position in Sanderson Farms Inc. and no plans to initiate a position in the next five business days. Additionally, we have received no compensation to write about a specific stock, sector or theme.