Market weakness has seen many investors’ portfolios fall in recent weeks, particularly those with heavy exposure to technology and growth-oriented stocks. Coupled with rising inflation, it has been a painful start to the year for many. During volatile periods such as this, adding a consumer defensive stock makes sense. Sanderson Farms (NASDAQ: SAFM) is a $4.2 billion chicken producer and wholesaler that can provide diversification to those investors with high beta portfolios.
Sanderson Farms processes and sells chicken products to retailers, distributors, and restaurants across the United States in a variety of formats such as fresh, frozen, and prepared formats. The Mississippi-based company was founded in 1947 and is still run by a member of the Sanderson family.
From a valuation perspective, Sanderson Farms appears cheap compared to peers in the consumer defensive space. SAFM has a PE ratio of 9.2, compared to the industry average of 24.0 and the S&P PE of 27.4. The stock still looks cheap when compared more narrowly against small-cap food companies such as Treehouse Foods (NYSE: THS) with a PE of 31.8, Nomad Foods (NYSE: NOMD) with a PE of 20.0, and Flowers Foods (NYSE: FLO) with a PE of 27.6. Sanderson Farms also looks attractive from a Price/Sales view, with a 0.9 ratio compared to the industry figure of 1.8 and the S&P 500 reading of 3.1.
On the growth front, Sanderson Farms has demonstrated steady progress that falls in between the consumer defensive sector and the broader market as a whole. The company has averaged sales growth of 11.2% and EPS growth of 19.5% over the past five years. These figures have outpaced the sector which has grown sales and EPS by 1.8% and 6.5% respectively over the same period. SAFM has lagged the S&P 500 however, which has grown sales by 13.1% and EPS by 24.2% over the past five years. A defensive name that is a relatively fast grower within the space but features a beta of only 0.67 can provide a hedge against higher volatility portfolio components while still featuring solid growth potential. The stock also has a dividend yield of 0.94% which helps total return.
Sanderson Farms does not have a large analyst following, possibly due to its small-cap size. The company is currently rated by four analysts, all of whom have a “hold” rating on the stock and an average price target is $203, which would represent steady but not explosive growth from current price levels.
The current inflationary environment, while challenging for most firms across all industries, may be less of a headwind for a chicken-focused company such as Sanderson Farms. Chicken is typically a less expensive form of protein compared to beef, pork, and seafood so while rising input costs will need to be offset with higher prices, the potential for stifled demand is less so compared to other meat proteins. Plant-based alternatives such as Beyond Meat (NASDAQ: BYND) and Impossible Foods have emerged as a potential alternative in recent months, but they have had several operational challenges lately so the challenge may be mitigated for the time being. For investors in search of a small-cap name with solid growth prospects, low beta, and a decent yield, Sanderson Farms warrants a closer look.
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