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Citigroup just upgraded this small cap stock to a “buy” on an expected share buyback

The share price of Inghams Group Ltd (ASX: ING) just got a boost to a two-week high after Citigroup upgraded the chicken supplier to a “buy” from “neutral”.

The stock jumped 0.9% to $3.58 in afternoon trade, outpacing the All Ordinaries (Index:^AORD) (ASX:XAO) index which is 0.3% higher.

Inghams has been gaining favour with analysts recently, particularly after the collapse of a smaller rival Red Lea Chickens a few weeks ago.

Citigroup has upgraded its earnings forecasts on the stock and bolstered its price target to $3.90 from $3.60 as it believes the Australian market backdrop has become more favourable for the company.

“Inghams has lifted prices by 1.5%-2.0% in retail earlier this calendar year. Given stable beef prices, we expect limited negative volume impact,” said the broker.

“Given higher chicken prices, we lift our EBITDA [earnings before interest, tax, depreciation and amortisation] for Ingham’s Australia and now forecast $173 million for FY18e, up 9%.”

What is also likely to excite investors is Citigroup’s expectation for management to undertake a share buyback due to the strength of Inghams’ balance sheet and greater liquidity in the stock.

A buyback of 10% of Inghams’ stock over the next two years will lift the company’s earnings per share (EPS) by 5% and the buyback could be announced when the company hands down its results in August, if not sooner, according to the broker.

Inghams is a major supplier to supermarket giant Woolworths Group Ltd (ASX: WOW) and the increase in chicken prices have given analysts hope that food deflation, which has impacted on the revenue of Woolies and Wesfarmers Ltd (ASX: WES), is coming to an end.

It may be time for investors to switch from beef to chicken with the share price of Australian Agricultural Company Ltd (ASX: AAC) heading in the opposite direction after management announced a profit downgrade and a change in strategy for its premium non-wagyu supply chain from meat to live cattle sales.

The stock tumbled 1.3% to $1.16 in afternoon trade and a recommendation downgrade by Bell Potter to “hold” from “buy” isn’t helping either.

“Our Buy thesis had previously been centred on the ability of AAC to add value to the herd through the pursuit of a branded beef strategy that would reduce the reliance of earnings on commodity aspects of the supply chain (i.e. cattle sales) enabling an improvement in ROIC [return on invested capital] through the cycle,” said Bell Potter.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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