Circling Back on Chicken

This article originally appeared on RealMoney.com on Sept. 2, 2014 at 1:00 p.m. To read more content like this AND see inside Jim Cramer's multi-million dollar portfolio for FREE... Click Here NOW.

Given the rise in beef and pork prices at the start of 2014, I was all bulled up on the shares of Pilgrim's Pride  (PPC) . Given the tone of the consumer at the time, prospects for the switch to more affordable chicken over other protein sources seemed high. It didn't hurt that more fast food and casual dining restaurants were also making the switch with their menu items, another positive for Pilgrim's Pride shares as well as those for Sanderson Farms  (SAFM) . During the mini bidding war for Hillshire Brands, I cashed out of my Pilgrim's Pride shares with a hefty profit, but there's a reason for revisiting Pilgrim's Pride shares as well as Sanderson Farms shares.

First off, as Lenore Hawkins and I noted in last week's Corner of Wall & Main, food prices continue to be a major pain point for people. According to survey data by Consumer Edge Research, last month 36% of high-income households, (defined as those earning more than $100,000 a year) said that food prices are negatively impacting their overall spending habits, up from 20% in January. With beef prices up just over 50% since June 2013, odds are consumers and restaurants will continue to shift over to poultry where and when possible.

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Second, over the past four months, corn spot prices have fallen 30% since May. Driving that fall, expectations for the corn crop have been steadily moving over the past few months, and now the U.S. Department of Agriculture is expecting a record corn harvest. A separate survey last week indicated that a dry July might bring down yields a bit, though not significantly. Making matters worse, the USDA estimates that China could be sitting on 150 million tons of grains such as rice, wheat and corn. Per the data, that is double the 75 million tons last year and adds to an oversupply of these agricultural commodities.

On the one hand, those low prices are bad for farmers as it saps their income, and that means bad news for agricultural equipment companies such as Deere  (DE)  and AGCO  (AGCO) . How bad is it? Deere has announced that it will lay off 1,000 workers, with AGCO also trimming heads and Wells Fargo saying that the farm equipment cycle peaked last year.

On the other hand, however, falling input prices (commodity or otherwise) will in all likelihood lead to a better cost structure and better margins. While a number of industries and companies count corn as a major input, far less that are benefiting from the rise in food prices and protein prices in particular. That's where both Pilgrim's Pride and Sanderson Farms come in. Some will probably ask about Tyson Foods  (TSN) , but remember that even before it integrates Hillshire, roughly half of its operating profits were derived from beef sales.

Wall Street has EPS estimates for these two companies falling in 2015, but given the sharp move lower in corn prices, odds are we could see some upward revisions over the coming months. Normally we would say a "rising tide lifts all boats," but this time it's more like "falling input costs will drive margins and earnings higher." We saw this in spades over at Starbucks  (SBUX) , as coffee prices fell during 2011-2013.

All of this means that you could probably buy either Pilgrim's Pride or Sanderson Farms shares. After crunching the numbers, however, at 9x to 10x 2014-2015 EPS, Sanderson Farms shares are better priced than Pilgrim's Pride shares at 12.5x to 13x 2014-2015 EPS. One other ding on Pilgrim's Pride shares was some recent insider selling by CFO Fabio Sandri. On a pullback, Real Money Pro subscribers should be piling up Sanderson Farms shares in their holdings.

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At the time of publication, Chris Versace had no positions in the stocks mentioned.

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