March 20, 2008

 

JP Morgan sees better times ahead for Tyson, Sanderson Farms

 

 

JP Morgan sees evidence of improving economic conditions for the broiler chicken industry along with better margins for beef processors.

 

As a result, the research firm on Wednesday upgraded its rating for Tyson Foods (TSN) to neutral from underweight and upgraded Sanderson Farms (SAFM) to overweight from neutral.

 

Pablo Zuanic, financial analyst at JP Morgan, said in a research note that Tyson Foods is already benefiting from capacity rationalization in beef packing.

 

Tyson discontinued cattle slaughter operations at its Emporia, Kansas, beef plant in mid-February, citing extended poor margins and excess processing capacity in the industry.

 

The research firm said estimated beef cutout spreads in February were US$15 per head and were averaging US$35 so far in March, compared with traditionally negative spreads in winter months.

 

Zuanic said the March spreads represent a US$56/head improvement since January and a US$45/head improvement on a year-on-year basis.

 

This is especially encouraging given that these improvements are being achieved in a period of seasonally low demand, he added.

 

In the poultry sector, processors Tyson Foods and Sanderson Farms should benefit from improving chicken economics.

 

The chicken industry has proven it can pass on higher feed costs by adjusting supplies. The sector also benefits from a trade down from other proteins to chicken" because hog and cattle producers also face higher grain costs, Zuanic explained.

 

Additionally, there are signs emerging of easing supplies. Egg set growth is now running at a 1.5 percent pace compared with 4 percent a few months ago, and Pilgrim's Pride (PPC) plans to adjust production by 1.5 percent and has said it is considering further cutbacks.