Since the beginning of the pandemic, supply chains have been in shock and food prices have soared. The average annual chicken price has recently grown by 38% year-over-year to $2.26 per kilogram according to a study from IndexBox.
Sanderson Farms (SAFM, Financial) is a poultry producer founded in Mississippi back in 1955. The company is a vertically integrated poultry farmer which produces, processes, markets and distributes frozen and fresh chicken products.
They are currently the third-largest poultry producer in the U.S. and processed over 4.8 billion pounds of meat in 2020. The firm operates 12 poultry plants and an integrated poultry complex in Texas. In total, the firm has the capacity to produce 13.6 million chickens per week. With over 17,000 employees and 1,000 independent growers, they are poised to ride the trends of increasing poultry prices. Customers include many leading brands such as Walmart (WMT, Financial), TGI Fridays and more.
Recent financial results
For full-year 2021, the company's revenue was $4.80 billion, up an incredible 34.7% higher than the $3.56 billion in 2020. In 2022, the trend continues and the trailing 12-month revenue has reached a staggering $5.2 billion, with profits soaring by 40% to $839 million, up from $596 million at the end of 2021.
Despite this fantastic revenue and profit boost, the stock is actually down 10% from its highs in August 2021. Now before you get too excited and think this is the bargain of a century, there are a few things you should know.
Firstly, the volume of chickens processed by the company has been the same in 2021, 4,842 pounds processed; it's only the price of the chicken that has changed. This is expected to adjust back to “normal” levels in the coming years.
Bill Gates (Trades, Portfolio) likes the stock
The Bill & Melinda Gates Foundation Trust, which is the funding engine of Bill Gates' (Trades, Portfolio) charitable foundation, has been buying shares of this poultry farmer in the fourth quarter of 2021, during which shares traded for an average price of $188.37. The stock is currently down 5% from then.
As we can see in the below chart, the volume of guru buys exceeded the volume of guru sells for the stock in the most recent quarter.
Is the stock undervalued?
In order to value Sanderson Farms, I have plugged the latest financials into my valuation model. Analysts are estimating revenues to decline by -10% this year, and margins are expected to decrease as well; thus I have taken this into account in my valuation. I have conservatively predicted margins to decrease from 16% to just 6% in the next three years, driven by rising feed costs.
From these assumptions, I get a fair value estimate of $228 per share. The stock is currently trading at $178 per share and thus is 22% undervalued. In addition, the GF Value Line, a unique intrinsic value calculation from GuruFocus, puts the stock at modestly undervalued.
Risks
There are risks for investing into this company, such as the rising popularity of meat-free and low-meat diets. Meat-free alternative protein sources aren't going away anytime soon. Moreover, the ethical concerns surrounding farming are becoming more apparent. Even activist investor Carl Ichan, who is know for his tough persona, has recently threatened to "wage war against McDonalds (MCD, Financial)" because of the terrible way they treat animals during farming (according to a Bloomberg interview).
There is a planned merger as commodities trader Cargill Inc. and Continental Grain Co announced they would acquire Sanderson Farms and merge it with Wayne Farms. However, this has raised antitrust concerns with U.S. lawmakers.
Conclusion
Sanderson Farms is the third-largest poultry producer in the U.S. and is riding the wave of higher chicken prices. This has translated into fantastic revenue growth and meteoric profit boosts. Given those factors, the stock trades at an attractive valuation and offers a 23% upside, even despite expected revenue declines in the near future. The antitrust investigation will be a near-term issue for the firm and may prevent the acquisition. However, given the unstable global situation, a defensive stock trading at an attractive valuation is difficult to ignore.
