A fifth retail tray-pack chicken processing complex might the next construction project for a debt-free and flush-with-cash Sanderson Farms.
Speaking at the Stephens 2016 Spring Investor Conference, Sanderson Farms CEO Joe Frank Sanderson, Jr. said, “The next processing plant [to be built by Sanderson Farms] would likely be producing chicken for the retail grocery business.”
Sanderson was answering a query about the investment priorities at the third-largest U.S. chicken producer, which is debt free and evaluating where to grow next.
As Sanderson Farms continues construction of a new poultry processing complex in St. Pauls, North Carolina – which is expected to open during the first fiscal quarter of 2017 – the company had $223.1 million in cash at the close of its second fiscal quarter in April 2016.
Chicken for prepared foods or retail grocery?
It was 2011 when Sanderson Farms last built a processing plant producing chicken for the retail grocery sector. That project was followed by a big bird deboning plant which opened in 2015 in Palestine, Texas, and the plant in St. Pauls, which is also a big bird deboning plant.
After building a big bird deboning plant which opened in 2015 in Palestine, Texas, with another scheduled to open in 2017 in St. Pauls, N.C., the next construction project for Sanderson Farms could be a complex producing tray-pack chicken.
The company had previously indicated its next building project might be a second prepared foods plant, but profit margins have continued to be very favorable for plants producing tray-pack chicken.
The tray-pack chicken sector’s profitability has been strong because the supply of chicken available for grocery stores has not grown significantly. Chief Operating Officer Lampkin Butts said, “[Sanderson Farms] opened a new tray-pack retail plant in Kinston, North Carolina, in 2011, and Tyson Foods has converted a plant [to the production of chicken for retail grocery]. Other than that, the chicken supply for the retail grocery segment has been flat.”
Sanderson said the company, nonetheless, remains committed to supplying the big bird deboning market.
“We would evaluate things after [the next investment in new facilities] to determine what would be built next, but we are still going to be building,” he said.
Would Sanderson Farms make an acquisition?
Would Sanderson Farms consider acquiring facilities in the future? The company has not made acquisitions in the past, preferring to build its facilities from scratch. But when asked during the Stephens conference about the possibility of future acquisitions, Sanderson was more equivocal on this question than in the past.
“We need to put our balance sheet to work for us," he said. "We did not intend to be debt free, and we are not making any money off of the cash. We want to use that money to increase earnings per share. That’s as far as I can go [in my statements].”