Food processing can be a volatile business. Changes in commodity prices, diseases, natural disasters, and trade disputes can all disrupt operations. As a result, solid companies in this industry can face years of poor profitability.

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    2 replies to "2019 Should Be a Bounce Back Year for This Food Processor"

    • Jonathan Lim

      Sam. Great thesis. Enjoyed the discussion on economic earnings.

      On the reverse DCF. You used a forecast period of 10 years. Is this derived from the market-implied forecast period? If so, is it possible for the expected value forecast period to be different from the market-implied forecast period?

      Thanks Sam.

    • Sam McBride

      Thanks Jonathan,

      The market-implied GAP for SAFM is actually just 1 year in our rating system due to the fact that our model assumes a significant regression to the mean for NOPAT margins.

      In terms of the reverse DCF, we typically use a 10-year forecast period when we don’t have any reason to believe that a company will have an especially long or short GAP. Our goal for the reverse DCF is not to forecast the future, since we know we can’t do that. It’s just to quantify what the market expects, and what a company needs to do for shareholders to have upside potential.

      For SAFM, if we use the same assumptions for the reverse-DCF but shorten the forecast period to 5 years, we get a fair value of ~$163/share. If we double the forecast period to 20 years, we get ~$232/share.

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