Attention! There is no need to fear the avian flu. Your chickens will not — I repeat, will not — require any special treatment should they die of the flu. They will not rise from the dead and attempt to eat you as retribution.
Nevertheless, because a “highly pathogenic avian flu” outbreak was confirmed in Arkansas turkeys, chicken producer stocks such as Pilgrim’s Pride Corporation (NYSE:PPC), Sanderson Farms, Inc. (NASDAQ:SAFM) and Tyson Foods, Inc. (NYSE:TSN) fell as much as 6% Wednesday. Even Buffalo Wild Wings Inc. (NASDAQ:BWLD) fell 2%, perhaps because investors are fearful that the cost of wings will go up even more than already expected.
It’s an overreaction, as zombie apocalypse (and avian flu) rumors always are, because the producers have so many protections and precautions in place to deter infection. Birds are moved in and out of production houses in flocks, and enclosed barns are used to keep any wild birds that are avian flu carriers from invading.
This is how the stock market operates. It sells first and asks questions later.
The fears, just so you understand the “logic” behind this, is that if the avian flu spreads, then orders for chicken will plummet in the near-to-medium term. Countries stopped importing U.S. beef during the mad cow disease zombie apocalypse, but eventually everything returned to normal, so the concern is that the same thing could happen.
Yes, this avian flu could become something big that really whacks the companies, but it is unlikely and even if it does happen, the balance sheets of all the producers are in fine shape.
To that end, let’s take a look at the stocks and see if any offer compelling value. PPC has $573 million of net cash, or $2.50 per share, giving PPC an effective stock price of $22.86 on Wednesday’s close. With 2015 earnings per share expected to grow 15% to $3.16, that puts PPC stock at a price-to-earnings ratio of only 8!
Ah ha! I smell a GARP stock in PPC. Its free cash flow is stellar, rising from a mere $100 million in 2012 to $900 million in 2014. Buy on the chicken zombie apocalypse dip? Yes!
TSN has $438 million of cash, but – ouch — $7.5 billion in debt. TSN closed Wednesday at $37.55. With 2015 EPS expected to grow 17% to $3.43, that puts TSN stock at a P/E ratio of only 11. So again, we have a stock that is both growth and value. The debt is ugly, but it’s generating interest at less than 2%, so it’s not so bad.
You could buy this if you want, but I prefer PPC’s balance sheet.
SAFM has $145 million in net cash, or $6.50 per share, giving it an effective price of $72.50 per share. Alas, SAFM’s earnings are only expected to grow 5% this year and decline thereafter. I wouldn’t bother with SAMF stock here.
PPC seems to be the winner. I would establish a position now, but be prepared to average down if sentiment worsens.
One thing is certain — the avian flu makes these guys a lot more attractive:
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
