2015 has been challenging for companies in the poultry processing business and things have been no different for Sanderson Farms (SAFM, Financial). The avian flu was the key factor that set up a challenging year for the industry, and Sanderson Farms saw its sales and profit being impacted through the year. However, even amid the challenges, the stock remained largely sideways with negative returns of 3.1% for 2015.
With the industry taking steps to control and prevent another flu outbreak, 2016 looks like a year of recovery and stock upside for industry players. Among the stocks that are attractive in the industry, Sanderson Farms is a name to be considered.
As Sanderson Farms stock remained sideways in 2015, one of the factors that makes it worth considering is the valuation. The stock currently trades at TTM PE of 8.6, forward PE of 12.3 and price to sales of 0.65. While these valuations are certainly attractive, a discussion on the company’s growth outlook is needed in order to back the upside story.
The first point that is worth considering is that the company’s revenue and profits were hit in 2015 due to an export ban by many countries on account of the avian flu. Exports will remain erratic but gradually improve in 2016. With poultry being the most affordable protein, the market demand is likely to remain robust and improving exports is likely to be the first upside trigger for the stock in 2016. Exports to South Africa (new export market) were likely to start toward the end of 2015, and this can potentially provide growth traction in the early part of 2016.
The second important point to note is that the company is on an expansion spree and Palestine, Texas, is likely to witness increasing production in 2016. In addition, the company’s new complex in St. Pauls, North Carolina will start production in 2016. At full capacity, these two production units will represent an increase in production of 32%. Therefore, once the export market is stabilized, and the flu is completely wiped out, the company has strong growth visibility for 2016 and 2017. This makes Sanderson Farms attractive and probably explains why the stock has remained resilient even with negative news flow.
It is also important to note here that, in the last few years, retail meat and retail pork prices have trended higher. During the same period, the price of composite broiler has remained sideways. In the coming years, an increasing shift from meat and pork to broiler seems likely, and that will ensure that the company’s new capacity additions are utilized at the optimum. Therefore, industry dynamics support the company’s capacity expansion, and continued capacity growth can be expected for Sanderson Farms.
From a balance sheet perspective, Sanderson Farms is well positioned with $197 million in cash and zero debt. This gives the company high financial flexibility, and leveraging for organic or inorganic growth is not a concern. With no debt servicing concerns, Sanderson Farms will continue to pay robust dividends, and this is yet another reason to consider exposure to the stock.
In September, the company announced a regular quarterly dividend of 22 cents per share and special dividend of 50 cents per share. This translates into an annual dividend of $1.38 per share. In the coming year, the current level of dividends is likely to sustain and lead to higher special dividends if the export market witnesses a strong recovery.
Considering these factors, Sanderson Farms is a stock worth buying for 2016. After sideways movement in 2015, breakout on the upside is likely in 2016, and current levels are attractive for 12- to 24-month exposure to the stock.
Disclosure: No positions in the stock
