Is It Time to Buy Chicken Stocks?

There are some good reasons to bet on chicken-related assets. What's the outlook for Sanderson Farms and Industrias Bachoco?

Jul 16, 2014 at 5:32PM

Some positive signs coming from the poultry industry are indicating that it could be a good time to start a position in some chicken-related assets. First, lower grain costs have been helping the sector. The grain used for chicken feed is one of the industry's biggest costs, and this reduction has brought margins up straight away. In addition, the relatively high prices of competing protein seems to have shifted some consumer demand to chicken, maintaining profitable retail pricing.

And pricing is key. If you take a look at the price for U.S. wholesale chickens, it has increased more than 6% since the beginning of the year.

US Chicken Wholesale Price (Georgia Dock) Chart

US Chicken Wholesale Price (Georgia Dock) data by YCharts

But what stocks should you buy?
Here's a good one to start with, Sanderson Farms (NASDAQ:SAFM). This company brought positive results for its second fiscal quarter 2014. Net sales were $660.7 million, up 6.4% compared to the $621.2 million made in the same period a year ago.

Sanderson Farms has been benefited by increased volume, but what really helped the company were the lower feed costs. Compared with last year's second fiscal quarter, processed feed flocks decreased 19.1%, quite a good number.

Embracing the opportunity, the company is expanding its feedmill, hatchery, and processing plant sites in Palestine, Texas. And it's making decent progress, in fact, the first pullet flock associated with this facility should be out this month.

Mexico's leader
The case for Industrias Bachoco (NYSE:IBA), Mexico's biggest producer of chicken products, is a bit different. Net sales decreased 3.5% year over year in the first quarter 2014. But if you analyze what happened, total volumes improved but with lower pricing on chicken and balanced feed especially, which the company produces. Though the lower raw material prices more than compensated the drop in chicken prices and improved operating margins, which went from 7.6% to 9.2%.

Unfortunately since the beginning of this year, Bachoco has to face higher income tax in its home country. The tax hiked from 21% to 30%. This is not a minor thing, since Mexico operations represent about 80% of total sales.

However, some risks and threats that Bachoco had to face are part of the past. Currently, the fears of a new avian flu outbreak have diminished considerably. During 2013, production decreased slightly and consumption of chicken dropped about 1.5% in Mexico due to these issues. Now everything is on track to regain the lost territory.

Final thoughts
Overall, it's a good time to bet on chicken assets. Although total grain costs have moved higher, they remain below last year's prices, and with the current strong demand and pricing for chicken products, Bachoco and Sanderson Farms should be able to profit. Plus, the summer months are typically the peak demand period for chicken, which should boost activity levels.

Sanderson Farms looks a bit more promising, considering that its expansion plans are almost realized and that the company has no exposure to Mexico's disease threats.

Nonetheless, with less disease risks along the way, Bachoco can exploit its market leadership in Mexico and improve operations in the U.S. If prices maintain this upright trend, the company will not disappoint you.

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Louie Grint has no position in any stocks mentioned. The Motley Fool owns shares of Sanderson Farms. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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