Sector financial performance:

This company has been grouped in meat processing - pork a sector of food industry.

This is a sector that has experienced slow growth (1-2% annually) in demand between 2015 and 2017 and a decline (1-2% annually) in 2018 as indicated by changes in organic volume of some of typical company. Unfavorable consumers’ preference causes huge downward pressure on price of pork and intensive competition while increasing feeding grain costs created need for increasing price. In such a situation, companies have been forced to raise price, which may be the reason behind the declining sale volume as a result of competition disadvantage with alternative meet/protein food. In order to improve profitability, companies found that they have to lower their production costs, the feeding grain mainly. However, it is obviously not sustainable in the current grain market. In addition, due to the market pressure on revenue companies have to spend more on selling and marketing, which in return worsen margins. The typical gross margin in this sector is about 21% and operating margin is about 12% (2018).

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Company performance:

It seems the demand for perishable and refrigerated meet products of this company may be declining in 2018 after a few years of growth as indicated by declining sales volume while the average price per pound increased.

For fiscal 2018 compared with 2017(ended 20181028)

Organic sales decreased 0.9% due to decrease of 1.4% in sales volume.

For fiscal 2017 compared with 2016(ended 20171029)

Organic sales increased 3% due to increase of 1.5% in sales volume.

For fiscal 2016 compared with 2015(ended 20161029)

Organic sales increased 2.8% due to increase of 1.6% in sales volume.

Sales increased by 2.8% and -0.6% in 2016 and 2015 respectively.

It presents amazing ability to improve its gross margin (two years straight) by lifting its margin to about 23% of 2016. Its gross margin then went down to 21% in 2018 due to lower meet price and increased feeding costs. While spending on selling and marketing has been increasing it helped in improving sales during the same period. It generates an operating margin of 12% with SG&A% of 9%.

Stock price

Our valuation methods and analysis indicate that this stock is currently relatively overvalued by the market with an enterprise price/EBI ratio of about 30($45) considering the declining demand/volume.