SAFM dipped below resistance today @ 75.56 + closing @ 76.09 in the face of increased liquidity (facility increased from $600 to 750m) + dividend inline with past performance despite depressed stock price. Bird flu scare is pretty significantly priced in to the stock which is reflected by down week (for SAFM) vs. an up week for market. Bird flu scare is definitely the catalyst (competitors PPC/TSN who are also down, TSN less so). I remain optimistic for reasons previously discussed:
Near / Medium Term
- High cattle prices = higher demand for secondary meats (ie, chicken)
- Low corn prices through year end = margin expansion for SAFM
- Low soy prices through year end = margin expansion for SAFM
- The above 2 = optimistic next 2q – 3q earnings (2015E forecast is ~7% eps growth); commodity prices must be monitored with care; 16E eps growth = (48%) decline – need to be cognizant when to pull out as we approach the less desirable portion of this business cycle
- Apart from supply constraints, the bird flu prices in an additional scare: export restrictions (China, South Korea, Mexico, Canada)
- Exports represent only a small portion of SAFM rev (China + Mexico = 54% of total export revenue (of which constitutes ~10% of total revenue)) so we can say 5% of revenue, which is relatively immaterial in the face of this buying opp (ie, a risk largely exaggerated in the 75-76 price point which = bargain $$$)
- Domestic affects are negligible. I believe cross-state export restrictions are currently limited to Iowa + South Dakota and even then US CDC (Center for Disease Control and Prevention) reiterate the avian flu = low risk for humans. Of course this isn’t the issue – the (near term) catalyst is the decreased chicken supply, currently
- While there is risk associated with possible contamination at SAFM, I do agree with your sentiment; that it remains low due to geographic proximity (iowa to Texas is 900 miles; Iowa to Mississippi = ~650 miles…). Not an expert on trade routes but seems distant enough?
- Contamination risk would come as a result of a van/truck/linehauler transporting something from ND/Iowa to Texas that has been exposed to chickens + not cleaned thoroughly which could introduce the virus to the region. Hopefully trade restrictions are effective here.
- Potential risk is for the avian scare to last for about a year, which is the same duration the market expects corn/soybean to sell at depressed prices. Negative news could negate our better margin forecast. I still remain bullish on market optimism reacting to positively next 2 q’s earnings
6.1x NTM PE can represent a pretty solid time to add my position. Investment horizon would be about 6-8months but I wouldn’t be afraid to profit take in the face of good earnings results.