Often, the Magic Formula® screens pull up numerous competing companies in the same industry. This usually indicates underlying trends in the industry, not necessarily the stocks, that may not be priced properly by the market.

In cases like this, I like to pit the competing companies against each other to see which is the best investment opportunity. And if, indeed, there is an opportunity to profit at all!

Such is the case today, as both Sanderson Farms (SAFM) and Pilgrim's Pride (PPC) have recently entered the screens. These direct competitors are both engaged in production, processing, marketing and distribution of fresh and frozen poultry products.

This is "A Game of Chicken" in more ways then one! Let's take a look.

Extra Crispy Operating Conditions

Both Sanderson and Pilgrim's have experienced some very good times lately.

In the past 12 months, Sanderson has seen its gross margins expand to almost 19%, vs. a 5 year average of 9%. Pilgrim's Pride has had even better success, upping its gross margins to 14.5%, vs. a 5 year figure of 5%. In fact, in the past 12 months, BOTH companies have generated more operating profit then they had in the previous 4 years combined!

What in the cluck is going on? Well, it has been a "perfect storm" of sorts for the chicken makers. For one, poultry prices have been strong. They increased 9% in 2014 and have risen almost 39% since 2010. Chicken has performed well as the price of beef has spiked dramatically in the past year, and as it continues to gain recognition as a good source of protein but lower in calories and fat than red meat.

Despite this, the success of these two companies does not have a whole lot to do with revenue growth. Sanderson has grown sales at a 7.6% compound annual rate since 2010, and Pilgrim's Pride just 3.8%. The story here is profitability, specifically gross margins.

To this, we look to the swings in 2 other commodities: corn and soybeans. These are the staples of chicken feed, and both saw dramatic price declines in 2014. Corn was down 19.5% from its highs and soybean prices were down 22.5%.

In a nutshell, this explains the dramatic improvement in profitability for these two companies. And don't forget the dramatic drop in crude oil prices, which will further help with production, packaging, and transportation costs.

Which Chicken In This Race?

Since both companies are benefiting from the same market conditions, which of the two is a better stock at this point in time?

If we're talking about the better company, the answer is Sanderson Farms. Sanderson has superior gross margins (18.8% vs. 14.4%), operating margins (13.8% vs. 12.1%), a better balance sheet (just a 2% debt-to-equity ratio, vs. 25% for Pilgrim's Pride), and it pays a 1% regular dividend vs. none for Pilgrim's Pride (although both firms have paid recent, large special dividends). These are not new trends, either - Sanderson has been a better operator than PPC for many years.

However, we're looking for the better stock. One simple advantage PPC has is that it has more room to improve. To management's credit, it has put its recent windfalls to good use, cutting its debt almost in half and building up cash balances to almost $870 million, far above what the company has ever carried in the past. Its balance sheet is now an asset, and interest coverage has ballooned to over 17, from under 3 for much of the past half decade. PPC is a strong company now.

At the end of the day, though, I still like SAFM as the better stock, even after PPC's 24% drop yesterday due to the ex-date for the special dividend. By any measure, the stock is a better value. It has a much lower P/E ratio (7.6 vs. 10.5), higher earnings yield (22% vs. 15%), lower price-to-sales ratio (0.68 vs. 0.85), lower price-to-book ratio (2.1 vs. 3.6), pays a dividend vs. none... you get the picture.

Are They Both Just Turkeys?

Still, it begs the question: is either stock worth consideration?

A lot of the investor interest doesn't think so. Both stocks have simply ENORMOUS short ratios (percentage of shares that are sold short), with PPC at 49% and Sanderson at 44%. A lot of investors believe that the current situation, particularly grain costs, are not sustainable, and PPC and SAFM will fall back into their historical, uninspiring financial models.

That's a game of chicken all in itself! A lot of shorts have gotten deep fried on these stocks, so far.

As for MagicDiligence... the best we can do is play the odds here. Corn and soybeans have historically traded quite erratically and unpredictably. One thing, though - I have my doubts that corn spikes up in to the $8 range that we saw in 2011 again. There has been some political backlash against ethanol subsidies and lower oil prices won't help that. I believe, in the long term, that Sanderson and Pilgrim's Pride will benefit from sustained lower feed costs. I don't see both firms falling deep back into the red like they did during the corn boom. However, nor do I see sustainable high-teen's margins.

We'll take a middle-of-the-road approach and assume some natural cyclical decline from the current favorable situation - a 30% haircut to cash flows within the next 2 years (after a relatively strong 2015). After that, I assume operating margins for both companies stabilize at 10-12% levels, with modest top-line growth.

That leaves me with a price target of about $93 for SAFM and $25 for PPC. At current prices, that's about 12% of upside for SAFM, and about 11% of *down*side for PPC. This makes sense to me, as Sanderson is a demonstrably cheaper stock at present. However, neither of these birds qualify as a candidate for a Top Buy recommendation.