Sector financial performance:

This company, who primarily produces and processes chicken, has been grouped in Meet processing – chicken sector of food industry.

While demand for chicken products of companies in this sector seems to be still not strong, demand may be picking up as indicated by signs from both increase in sales volume of them and rebounding selling price of their products. Backed by increasing sales volume and, to less extent, by rising price, sales of those companies has been growing in the past two years (annual 4-5% growth) as compared with  negative revenue growth ( -7%-0%) in 2016 and 2015.

Profitability of companies in this sector seems to be directly related with price and input costs of live stocks(feeding costs and live poultry costs). Between 2015 and 2016, continuingly declining selling price of chicken resulted from imbalanced supply and demand significantly hurt margin of companies while input cost such as feeding grain price declined as well. While we have seen improved margin in 2017 from those companies as a result of bouncing back of price and benefiting from renewed future contracts of feeding commodity, the margin turned to go down again as selling price went down and input costs went up in 2018. Therefore, most companies have been seen shrinking margin and cash flow in the past several years due primarily to declining price with weak demand behind it. And the current typical gross margin is about 12% with 5% SG&A and 6% operating margin.

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Company performance:

Demand (poultry mainly) seems to have been getting strong since 2015 but price fluctuated in a large range during this period of time.

For the first nine months of fiscal 2018 compared with same period of 2017 (ended 20180730)   

Net sales increased about 0.6% due to increase of about 7.4% in volume of poultry products offset by decrease of 7% in average price.

For fiscal 2017 compared with 2016 (ended 20171030)                                      

Net sales increased about 19% due to increase of about 13% in volume of poultry products and increase of 6.5% in average price.

For fiscal 2016 compared with 2015 (ended 20161030)                                      

Net sales increased about 0.4% due to increase of about 9% in volume of poultry products offset by decrease of 8% in average price.

Sales gained light growth by 1% in 2015.  

Correspondingly, its gross margin fluctuated widely with changes in price and input costs. Its current gross margin is about 13% with 7% SG&A and 6% operating margin.

Stock price

Our valuation methods and analysis indicate that this stock is currently relatively fairly valued compared with its peers but may be overvalued by the market with its current enterprise price/EBI ratio of 19 since we cannot find any support for this high multiple from both increase in demand and potential improvement in margin/price of this company.