Intrigued by this thesis, I ran the company's numbers through my Five-Minute Test, and it passed with flying colors. Next, I searched the RealMoney and Street Insight archives and found that no one on had written an in-depth column on this business. A fresh idea! Another plus.

So I printed the last five years' worth of 10-Ks and the latest proxy, then crunched the numbers through my spreadsheet. Here's what I like about the company, in order of importance.

Revenue growth. For the four years ended Oct. 31, 2003, revenue has risen 12%, 17%, 7% and 20%, respectively.
No customer concentration. Sanderson's largest customer accounted for 11.7% of sales last year.
High-quality accrual profit. The company has produced defensive and enterprising profit for the past three years.




Profit Quality Here's how it breaks down




(I'll address a bit later why the company lost money in 2000.)

Forging an Earnings Power Staircase. What's more, Sanderson moved in an upper-right direction last year, the hallmark of profitable growth.




Climbing Higher The staircase is forming




(To learn more about the Earnings Power Chart, check out my just-released book It's Earnings That Count.)

Low price-to-earnings ratio. At $41, the company has a trailing P/E ratio of just 10.
Low price-sales ratio. It's just 0.6.
High cash-on-cash return. Defensive profit last year totaled $53 million. Given a current market value of $538 million, that gives you a price-defensive profit ratio of 10.7 and a defensive yield of 9.4%. (The defensive yield is the reciprocal of the price-defensive profit ratio.) This high return compares favorably with the five-year Treasury yield of 3.06%.
Strengthening balance sheet. Net debt is falling, at just $24 million now vs. $159 million a few years back.
Credit risk appears nil. Normalized (i.e., four-year average) defensive profit is $27 million. With $24 million of net debt, management can repay its loans in less than a year. Sanderson's Z-score also looks impressive. Created by Professor Edward Altman of the Stern School of Business at New York University, the Z-score is a predictor of financial bankruptcy. According to Altman's research, a company that scores above 3.0 is considered safe. Sanderson's Z-score is 7.7 based on its latest 10-K.
Clean financials. The company's CFO, Michael Cockrell, tells me there are no restatements or write-offs in the last 10 years. Excellent.
Positive tangible book value. This is corporate book value minus goodwill and other intangibles. The amount: a solid $197 million.
High -- and improving -- returns on capital. Returns are 8%, 13%, 11% and 23%, respectively, for the four years ending fiscal 2003.
Rising dividend. Also, the current dividend yield is 1.18%.
Stock-based compensation. Just $60,000 on $54 million of accrual profit (net income). This low ratio of stock-based compensation to accrual profit means outside stockholders are not being diluted.
Stock buybacks. Share count is down 7% in the last four years. What's more, these buybacks were made at lower prices.
Name-brand auditor. Sanderson received a "clean" opinion from Ernst & Young, which is especially important when you are dealing with small-cap firms.
Owner-operators. Insiders own 69% of the company, according to Yahoo! Finance. Based on the firm's current market value, senior management has $364 million invested in the business. If you suffer, the folks running the company also will suffer.
Low institutional ownership. Respected fund managers like Royce & Co. and Dimensional Fund Advisors own 30% of the company. Low institutional ownership is desirable, because as Sanderson grows other funds will want to buy the stock. This upward pressure will help boost the stock price.
Low short ratio. Shares short are just 1.2% of the float. A high short ratio -- say, more than 10% -- might be cause for concern.
Mundane business. The company processes, markets and distributes fresh and frozen chicken and other prepared foods. There is no risk of product obsolescence.
Americans are eating more chicken. Per capita consumption in the U.S. over the last four decades has increased, as data from these key years show:

1960, 28 lbs.
1970, 40 lbs.
1980, 48 lbs.
1990, 62 lbs.
2002, 82 lbs.

The trend is your friend.

Growing market share. Sanderson is the sixth-largest poultry producer in the country, behind Tyson (TSN - commentary - Cramer's Take), Pilgrim's Pride (PPC - commentary - Cramer's Take), Purdue, Gold Kist and Wayne Farms. Also, Sanderson has a 3% market share, about double from a decade ago.
Employee relations appear good. Many positives here. The CFO tells me there have been no strikes since the mid-1970s. Also, an official from the Occupational Safety & Health Administration (OSHA) describes the plants as safe places to work. Meanwhile, full-time employees are eligible to participate in the company-sponsored employee stock ownership plan and 401(k) plan. Last, Sanderson has a day-care facility at one of its plants that cares for 240 children. It's the finest in the state, according to the company's Web site. This tells me the company put some thought into the child care operation, which means (theoretically, at least) happier parents and more motivated employees, a stronger corporate culture, etc.