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Bull of the Day: Sanderson Farms (SAFM)

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Sanderson Farms (SAFM - Free Report) is an integrated poultry processing company, produces, processes, markets, and distributes fresh, frozen, and prepared chicken products in the United States. The company sells to retailers, distributers and casual dining operators. Sanderson was founded in 1947, is based in Laurel, Mississippi and employs over 12,000 employees. The stockis ZacksRank #1 (Strong Buy) and todays Bull of the Day.

Sanderson has a market cap of $2 billion with a Forward PE of 13. The company has a dividend of 1% and expected EPS growth rate of 5%. The stock sports Zacks Style Scores of “A” in both Value and Momentum. In addition, the company also sits in an industry that is ranked 6 out of 265 (Top 2%) in the Zacks Industry Rank.  

Q2 Earnings

Sanderson reported earnings in late August, with an EPS beat of 8.52%. The company did miss on revenues , which was due to food service traffic and demand in the US being “stubbornly static”. However, the company saw chicken prices move significantly higher in August.  

CEO Joe Sanderson Jr. had some comments on the quarter and the facilities in Texas and North Carolina: “We continue to be pleased with progress at our new Palestine, Texas facilities, said Sanderson. The plant is now operating at near full capacity, and the startup has been well executed. Construction continues on our new St. Paul’s, North Carolina facilities, and we look forward to the opportunities the new facilities will provide to our shareholders, our customers and our employees when we begin processing at the new plant during our first fiscal quarter of 2017.”

Surprise History

Sanderson has had a pretty good track record when it comes to beating EPS. After three straight EPS misses in 2015, the 2016 has reversed course. Last quarter’s beat was the third straight quarter with a surprise to the upside. With the positive earnings momentum, the stock has trended higher, up over 20% this year.

Investors should remember to keep an eye on estimates going forward. While last quarter did see an 8% beat, the previous quarters saw double digit beats of 36% and 74%. Hitting numbers like the company saw earlier in the year will drive the stock higher, back over the $100 level.

Estimate Revisions

Since the company reported, estimates have been revised higher for both 2016 and 2017. Over the last 90 days, estimates for the current year are up 14%, from $6.48 to $7.40. For fiscal year 2017, estimates have gone 86% higher, from $3.99 to $7.44.

For the current quarter estimates look good as well. Over the last 30 days, analysts have taken their estimates 31% higher, now seeing $2.39 now verse $1.82 a month ago. Earnings are not until mid-December, so there is some time for these estimates to change.

Chicken Price Manipulation

Last week there was strong selling in chicken stocks Tyson (TSN - Free Report) and Pilgrim’s Pride (PPC - Free Report) . The selling was derived from an analyst report alleging chicken price manipulation from Tyson and other chicken producers. The report was quickly shot down by the producers, but the news gave investors a chance to buy Sanderson which was down over 5% in sympathy.

In addition, the stock touched its 200-day moving average and quickly bounced. Any pullback in Sanderson’s stock could be bought against that 200-day, proving a good risk/reward opportunity.

In Summary

Chicken isn’t the most interesting business, but Sanderson is a very interesting stock sitting right below the important $100 level. While there is a great risk/reward setup for short term investors, the long-term story is there as well.

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