Sell: It's 12 Times Earnings!

"The sky is falling." -- Chicken Little

Those noting today's research firm downgrade (to neutral) of former Motley Fool Stock Advisor recommendation Sanderson Farms (Nasdaq: SAFM  ) may be asking, "Is 12 times trailing earnings, and nine times this year's earnings, just too expensive?"

For investors looking for value stocks, as Tom Gardner was when he made chicken producer and distributor Sanderson a recommendation, nine times earnings is, well, a great start. You're near nirvana when you see more cash than debt and a rising free cash flow that should cover the $96 million the company is spending by the end of 2005 for a state-of-the-art complex in Georgia. Although the 0.6% yield is chicken feed to Motley Fool Income Investors, it does show the company is not afraid to share its wealth with shareholders.

Sanderson has been hatching great results. Last year, the company earned $2.75 a share. This year, the company is crowing that $5.35 to $5.85 looks well within its range (or is that free range?). The only fly disturbing this barnyard wonder is that next year's earnings are estimated to be $5.23 a share. Before you say "ouch," realize that would price the stock at a well-below-market 10 times earnings.

Sanderson has been riding the strong surge in chicken consumption and prices. Blame it on the Atkins Diet or just good chicken, but news like "bulk leg quarter prices increase 77% for the quarter" has sent the stock to higher and higher roosts.

Conversation about bulk leg quarter prices will bore the local cocktail party crowd, but try this: "The stock has increased in price by nearly 200% over the last 52 weeks and is trading near its all-time high."

The feeling of nirvana also continues when you look in the competitors' coops. Sanderson has plump 17.2% operating margins. By comparison, broadly diversified Tyson Foods (NYSE: TSN  ) looks downright sickly at 4.1%, and Pilgrim's Pride (NYSE: PPC  ) is downright light at 3%. Switch meats from chicken to pork and even pork-rich Smithfield Foods (NYSE: SFD  ) looks less than fatted at 3.4%. Sanderson also tops the 4.4% margins at Mexico's Industrias Bachoco (NYSE: IBA  ) .

Any way you want to slice it, Sanderson looks like a value winner -- especially at the barbecue this Fourth of July.

Discuss Sanderson Farms, theFun(ky) Art of BBQ, or your favorite protein (meat) stockswithother investors on the Motley Fooldiscussion boards.

Fool contributor W.D. Crotty does not own any of the stocks mentioned.