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Subject:  SAFM Date:  3/9/2006  3:13 PM
Author:  hheiserman Number:  841 of 1817

Sanderson Farms has two problems: 1) it is a price-taker in terms of revenues and 2) it is a price-taker in terms of COGS (grain prices, principally). So, no competitive moat.

Still, there is money to be made at the right is true of all stocks.

If I were actively studying this company, I would take TTM sales and multiply by normalized gross profits margin. To normalize the gross profit margin, take the average over the last, say, 7 years and divide by 7. Then plug in current fixed expenses. If the chicken-producer is cheap based on normalized earnings, then maybe you have something.

Another approach is to divide Sanderson's enterprise value by the third-best earnings from the last decade. Again, a low EV/price ratio is desirable. I got this idea from John Dorfman, who writes a good column for Bloomberg.

I have owned Sanderson before, but am just watching it now. In addition to having a cheap value, I would also want to identify a catalyst and see meaningful insider buying before getting back in.

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