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Sanderson Farms' Ruffled Feathers

When the stock of a company you respect is near a 52-week low, it's time to pay attention again.

Such is the case with Sanderson Farms (Nasdaq: SAFM  ) . While a weak pricing environment has hit the stocks of many poultry companies -- including Tyson Foods (NYSE: TSN  ) , Pilgrim's Pride (NYSE: PPC  ) , and GoldKist (Nasdaq: GKIS  ) -- this might be the time to do some due diligence on a plucky little player with some solid operating metrics.

For the fourth quarter, Sanderson's total sales dropped about 4% as disruptions caused by Hurricane Katrina affected the company's production and shipping operations. Although net income doubled on an as-reported basis, this quarter's results include about $7.9 million in hurricane-related losses. Although the $2.8 million in deductibles is gone for good, some of the rest could be recouped from insurance policies.

Looking to next year, the company has already started locking in some lower feed costs for 2006 and continues to increase capacity. If pricing cooperates, that could make for a solid foundation to a good year.

Of course, that "if pricing cooperates" bit is sticky. It looks like chicken stocks are only increasing about 2% for the year to come, but chicken prices can swing dramatically. For instance, in this quarter alone, leg quarter prices were up more than 56% from last year, but breast prices were down more than 14%. The keys for a good 2006? Good discipline amongst U.S. poultry producers in terms of capacity, coupled with a continuing strong export market.

What could go wrong? Well, Brazil is a major poultry producer (including companies like Sadia (NYSE: SDA  ) and Perdigao (NYSE: PDA  ) ), and a big increase from it could hurt international pricing. Then, of course, there's the aviation flu issue. If it wipes out Asian stocks, that could be good news for American producers. But if the bug shows up over here, that could be very bad news indeed.

Pushing that all to the side for a moment, we have a company here that produces a very good return on its invested capital, has very little debt, pays a decent dividend, and has excellent margins relative to the competition. If Sanderson Farms can just manage to produce growth in the very low teens, this could be an interesting stock for patient investors.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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