Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Sanderson Farms, Inc. SAFM stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Sanderson Farms has a trailing twelve months PE ratio of 11.39, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 19.93. If we focus on the long-term PE trend, Sanderson Farms’ current PE is tad above its mid point level. However, the number has fallen rapidly in the last few months.
Furthermore, the stock’s PE also compares favorably with the Zacks classified Food-Meat Products industry’s trailing twelve months PE ratio, which stands at 16.23. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Sanderson Farms has a forward PE ratio (price relative to this year’s earnings) of 12.02, so it is fair to expect an increase in the company’s share price in the near future.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Sanderson Farms has a P/S ratio of about 0.76. This is much lower than the S&P 500 average, which comes in at 2.98 right now. However, as we can see in the chart below, this is somewhat around the highs for this stock in particular over the past few years.
If anything, SAFM is towards the higher end of its range in the time period from a P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.
Broad Value Outlook
In aggregate, Sanderson Farms currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes Sanderson Farms a solid choice for value investors and some of its other key metrics make this pretty clear too.
For example, the stock’s P/CF ratio (another great indicator of value) comes in at 5.90, which is better than the industry average of 5.96. Clearly, Sanderson Farms is a solid pick on the value front from multiple angles.
What About the Stock Overall?
Though Sanderson Farms might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘A’ and a Momentum score of ‘F’. As a result, Sanderson Farms has a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen one estimate go higher in the past thirty days compared to one lower, while the full year estimate has seen two going lower, compared to no movements in the opposite direction.
This has had a mixed impact on the consensus estimate as the current quarter estimate has edged up by almost 1% over the past one month, whereas the full year estimate has inched down by 0.6%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.
Sanderson Farms is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Furthermore, a robust industry rank (among the Top 15%) instills investor confidence. However, it is hard to get too excited about this company overall as over the past one year, the Zacks Food-Meat Products industry has underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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