Chicken producer stocks have been on a tear this year. The group's best performer has been Sanderson Farms (SAFM, +51%), followed by Pilgrim's Pride (PPC, +44%) with Tyson (TSC +7%) lagging. We selected SAFM and PPC as in mid-2015. In this update report, we are honing our focus in on SAFM over PPC as the idea with more legs (or wings) among chicken producers.
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These companies look similar from a high level. However, a closer look shows a number of factors favoring SAFM, including: a) higher margins and return on invested capital (); b) a narrower gap between GAAP profit and ; c) higher free cash flow () yield and a lower price-to-economic book value ratio (); d) stronger revenue growth and e) minimal debt relative to PPC and TSN.
Figure 1: Poultry Producer Comparison
Sources: New Constructs, LLC and USDA Market News
SAFM currently earns a and was upgraded from Attractive on March 8, 2017. PPC currently earn a Neutral rating and was downgraded from Attractive on August 4, 2017. Due to these changes and the relative attractiveness of SAFM as shown in Figure 1, we are closing our long position on PPC. Investors should focus on SAFM as the best way to play growing chicken demand.
Commodity Prices Create Tailwinds for Poultry Producers
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