On The Great Chicken Debate
Okay, so maybe it hasn’t quite risen to those proportions yet. But, if you’ve been reading this blog, or Shai’s blog, or the Value Discipline blog, you know there has been an ongoing debate about two chicken stocks: Sanderson Farms (SAFM) and Pilgrim’s Pride (PPC).
On January 5th, I suggested that investors should look at Sanderson Farms before looking at Pilgrim’s pride. Shai had invited me to put some of my stuff up on his blog. So, as this was a topic of both “Grahamian Value” and news value (on account of Pilgrim’s earnings warning/price drop), I sent the link over to Shai. He kindly ran it.
Now that would have been the end of it, but there was a comment made to the post ran on Shai’s site that prompted a post from Shai on blogging and investing. It’s a good post and an interesting topic, so I do encourage you to read it (for both posts on Shai’s site, the comments are worth reading as well). However, it really doesn’t have to do with The Great Chicken Debate.
It’s the comment itself that’s most relevant to this topic. In it, the author says a few words about Pilgrim’s Pride. Upon reading the comment, I decided I had no other choice but to take another look at PPC and SAFM (after all, maybe I was wrong). Well, I did take another good look at both companies, and decided I wasn’t wrong. So, I wrote a response to that effect.
The best part of all this was that it lead me to read some posts on Value Discipline, a blog which I am ashamed to say I was not familiar with. It’s a great blog; we need more like it. Of course, if you’ve been reading my blog, you already know that, because on January 5th, I posted a quick note mentioning this great blog and two posts about these chicken stocks.
Today, there’s a new post at Value Discipline entitled “Oh no…not chicken again!”. It’s the best thing I’ve seen written on this topic. Even I have to admit, it’s a far, far finer post than my original one.
I especially want you to note Rick’s use of the free cash flow margin (free cash flow as a percent of sales); this is an important metric, and one I have not yet discussed. It is of less utility over short periods of time and in commodity businesses. Well, that’s not exactly true. I should say it is of less utility in commodity businesses during a period of abnormal business conditions. However, it is an excellent number to use in comparing two or more competitors over a period of five to ten years.
I agree with everything in the post except perhaps with one slight omission. While it is true that interest coverage at both SAFM and PPC is ample at the moment, a review of both firms’ records will show that their interest coverage has not always been sufficient to provide suitable protection for the common stock. This isn’t surprising, because chicken is a commodity business. Interest coverage will be very poor in a period of unfavorable business conditions and very good in a period of favorable business conditions. However, I think you should be alerted to the fact that only three or four years ago, interest coverage at PPC was at a level that would have caused concern had it been sustained. A few years before that, much the same could have been said about SAFM. I can’t really blame Rick for this omission, as I made the same omission in all my posts. I just thought I should bring it up now, because if business conditions were to worsen considerably within the poultry industry, interest coverage could once again become an issue.
Anyway, it’s a great post.
Read Value Discipline’s “Oh no..not chicken again!”.