A year ago, I recommended Sanderson Farms (SAFM - commentary - Cramer's Take) because it was a growth company selling at a value price. For those who did buy it, terrific. The chicken processor recently sold for $45 a share, a 61% gain from a split-adjusted $28.
Now that the Laurel, Miss.-based firm's 2004 10-K is out, it's time for the annual check-up. While the stock is still worth owning for many of the reasons cited a year ago, I don't think holders will want to add to their positions at this time. For one thing, the fourth-quarter gross margin results were poor. In addition, the company is fairly valued now, based on my analysis.
Impressive Annual Results
Results for 2004 were impressive, as we see below. Sanderson's big jump in accrual profits (net income) was matched by higher levels of defensive and enterprising profits. Defensive profits is free cash flow, and enterprising profits is net return on capital. The two are not the same and both are required for a company to have authentic earnings power.
In addition, there is also a "tight" fit between the defensive and enterprising earnings figures and the published version filed with the Securities and Exchange Commission. The tighter this fit, the better the quality of a firm's GAAP profits.
Annual Earnings Look Good Sanderson has authentic earnings power and a tight fit
Sanderson also is moving in an upper-right direction through the Earnings Power Chart, forging what I call an Earnings Power Staircase. Forging a staircase is the hallmark of a conservative growth stock.
Forging a Staircase Sanderson's price action displays one of the hallmarks of a conservative growth stock
Earnings Power GE Needs to Better Its Practices 12/20/2004 7:23 AM EST A rash of acquisitions dilutes tangible assets and raises potential conflicts of interest with executive compensation.
Earnings Power Sticking With Sanderson Farms 11/19/2004 3:29 PM EST The bullish case for this company holds, despite its just-announced lowered estimates.
At the time of publication, Heiserman was long Sanderson Farms, although positions may change at any time.Hewitt Heiserman conceived the Earnings Power Chart, Earnings Power Box and Earnings Power Staircase. A financial analyst for the past 15 years, Heiserman is a member of the Boston Security Analyst Society and the Association for Investment Management and Research. He also authored It's Earnings That Count, a book published by McGraw-Hill. For additional information, please visit www.earningspower.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback and invites you to send it to hewitt.heiserman@thestreet.com.TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.
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