Sanderson Farms (SAFM) – Closing Long Position – up 80% vs. S&P up 71%

We made Sanderson Farms (SAFM: $136/share) a Long Idea on August 12, 2015 and reiterated the Long Idea on August 17, 2017 and January 30, 2019. At the time of the original article, SAFM received a Very Attractive rating. Our long thesis highlighted the firm’s consistent net operating profit after-tax (NOPAT) growth, rising demand for chicken products, and its undervalued stock.

This report, along with all of our research[1], utilizes our superior data[2] to get the truth about earnings, as shown in the Harvard Business School and MIT Sloan paper, “Core Earnings: New Data and Evidence.”

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During the 5+ year holding period, SAFM outperformed as a long position, rising 80% compared to a 71% gain for the S&P 500.

The firm’s return on invested capital (ROIC) has declined from 20% in 2015 to -3% TTM while its NOPAT margin declined from 8% to -2% over the same time. Given the deterioration in fundamentals, SAFM no longer presents quality risk/reward and earns an Unattractive rating. We’re closing this position.

Figure 1: SAFM vs. S&P 500 – Price Return – Successful Long Idea

Sources: New Constructs, LLC and company filings

Note: Gain/Decline performance analysis excludes transaction costs and dividends.

This article originally published on November 23, 2020.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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[1] Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.

[2] Our core earnings are a superior measure of profits, as demonstrated in Core Earnings: New Data & Evidence a paper by professors at Harvard Business School (HBS) & MIT Sloan. The paper empirically shows that our data is superior to “Operating Income After Depreciation” and “Income Before Special Items” from Compustat, owned by S&P Global (SPGI).

Click here to download a PDF of this report.

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