11-Bagger's Wings Clipped

Chicken processor and former Motley Fool Stock Advisor pick Sanderson Farms (NASDAQ:SAFM) saw an 11.6-fold increase in its stock price from May 24, 2000 (yes, five years ago today), to its all-time high on June 24, 2004. Lately, the trip has been downhill -- but the stock is still up an impressive 7.9 times over five years.

Five years ago, the company had $1.1 million in cash and $112.8 million in total debt. Today, the company reported that it ended the second quarter with $75 million in cash and $15.2 million against operating income of $129 million (on a trailing 12-month basis) -- and the company is currently adding a new facility in Georgia and expanding one in Mississippi. Talk about turning chicken into gold!

Sanderson had been riding trends to financial success. The high-protein-diet craze coupled with strong U.S. chicken consumption produced high prices for fresh and frozen barnyard fowl. But that good fortune is starting to get pecked away. Compared with last year's second quarter, net sales this year swooned 5%, and net income (after accounting for a one-time credit in 2004) sank 20.1%. Much lower corn and soybean prices (key raw materials) were not able to offset flat to lower chicken prices.

Those results might not be worrisome if competitor results were similar -- but they aren't. Gold Kist (NASDAQ:GKIS), trying to get more of its sales from value-added products, announced a small 0.8% drop in sales but a 29% increase in net income. Industry No. 2 Pilgrim's Pride (NYSE:PPC) said its sales fell 0.7% but net income soared 71%. Industry giant Tyson Foods (NYSE:TSN), meanwhile, clucked about a 0.6% increase in chicken sales but found itself beset by a 24% decline in operating income within its chicken segment, and a 36% decline in company net income.

Sanderson and Gold Kist have distinguished themselves from their peers by having industry-high operating margins. While Gold Kist's operating margins improved in the latest quarter by 0.4 percentage points to 10.5%, Sanderson's margins fell 3.7 percentage points to 16.5%. As strong as Sanderson's margins are, they still bear watching.

The two analysts who follow Sanderson expect fiscal 2005 (ending Oct. 5) earnings of $4.02 this year (9.4 times forward earnings), down from $4.56 last year.

But despite the bad news, cash-rich Sanderson is expanding and ready to grow, and it yields a tempting 2.3%. All that cash, and its high margins, are shelter for any unforeseen rainy day.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.