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No. of Recommendations: 12
Taking a look at SAFM, here is what I came up with. I couldn't find any breakout for advertising costs or operating leases, so the numbers below would be a little different if those items were included in the calculations.

Sanderson Farms (SAFM) Five-Minute Test

Criteria Pass/Fail
----------------------------------------
1. Auditor's Opinion Pass
2. Lawsuits Pass?
3. Unusual Losses Pass
4. Restatements Pass
5. Intangible Assets Ratio Pass
6. Debt to Equity Ratio Pass
7. Revenue Growth Pass
8. Stock Based Comp. Ratio Pass
9. Short Ratio FAIL

2: There are several active lawsuits, but since IANAL I don't know what the chances are of any material loss.

9: The short ratio has been increasing steadily since March, and now sits just above 15%.

Profit Summary

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*
Accrual 0.76 0.53 -0.11 0.03 0.71 0.50 -0.27 1.36 1.43 2.75 4.81
Defensive 0.41 -0.01 -1.86 -1.35 1.15 0.15 0.13 2.41 1.42 2.66 4.06
Enterprising 0.86 -0.26 -1.08 -0.98 -0.06 -0.45 -1.35 0.62 0.60 2.01 3.94

* = Projected

Quality of Profits and Earnings Power Chart™


View the Quality of Profits, Earnings Power Chart™ images (thanks to H. Heiserman for the Excel macros) and Price/Earnings History Chart at: http://www.xdiv.com/invest/pics/safm_ietc.gif

Croesus Test

Share and non-price dollar amounts are in millions.

Stock Inputs
------------
Price: $35.46
Shares: 19,938
Cash: 84,180
Debt: 15,550
Earnings: 107,067
Dividend: 0.89%

Growth Scenarios
----------------
Scenario: A B C D
# of Years: 3 3 5 5
Desired Return Rate: 17% 25% 17% 25%
Est. End P/E: 8 10 8 12
Est. Dilution: 2% 2% 2% 2%

Est. Earnings CAGR: 7.4% 6.6% 11.7% 10.1%

Sanity Check

With the QoP and EPC charts heading in the right direction, and fairly conservative Croesus numbers (although 2004 earnings look to be around 97 million as opposed to TTM used above) indicating necessary future earnings CAGR much less than previous years, the current price looks attractive. The real question, as always, is future growth. Analysts are estimating 8% annual earnings growth over the next 5 years, which fits well with the above valuation. However next year's estimates are lower than those for this year, which is probably one reason why the stock trades at such a low P/E.

Conclusions

There has been some insider selling recently, but total insider holdings are still around 57%. This is something to keep an eye on, but certainly not a show stopper. If the price were to decline by ten dollars on no substantial news, the company could show virtually no earnings growth over the next few years and still be undervalued at $25. It appears to me that the recent beat down in price is valid only if looking at the next year. Since I am in it for longer than that I opened a starting position today and will watch for that $25 level.
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