May 31, 2012

Sanderson Farms achieves Q2 profit on rising prices, production

As increased prices and production returned the poultry company to profitability, Sanderson Farms Inc. (SAFM) swung to a fiscal second-quarter profit.

The results "reflect improved market conditions driven primarily by a decrease in the supply of poultry products," said Chief Executive Joe F. Sanderson, Jr.

The latest period's profit breaks a series of five quarters in the red. Like its peers, Sanderson has struggled in the last year against rising feed costs, an oversupply of chickens and weak prices. Lately, though, falling feed costs have brought some relief to the industry. Rival Pilgrim's Pride Corp. (PPC) recently reported swinging to a profit, ending a full year of losses.

Costs for corn and soy meal, the company's primary feed ingredients, remained high compared with historical prices, but decreased compared with the previous year. Sanderson paid 6.4% less for corn during the latest period, while soy meal costs were down 15%. Sanderson said the company expects grain prices to remain volatile.

"While there is some degree of optimism regarding the 2012 corn crop fuelled primarily by the rapid planting progress this spring and the large number of acres expected to be planted, there is no margin for error with this year's crop. Until the crop is harvested, we expect to pay higher prices, at least over the short term, for both corn and soy meal," said Sanderson.

Market prices strengthened overall. In the latest quarter, boneless chicken-breast prices rose 2.3% from a year earlier, while the average price for bulk leg quarters increased 22%. Jumbo wing prices more than doubled.

For the quarter ended April 30, Sanderson reported a profit of US$23.9 million, or US$1.04 a share, compared with a year-earlier loss of US$16.3 million, or US$0.74 a share. Excluding inventory charges, the year-ago loss was US$0.56. Sales rose 24% to US$595 million, reflecting an 11% increase in pounds of poultry sold, primarily reflecting increased production from the company's Kinston, N.C. facility.

Analysts polled by Thomson Reuters recently expected per-share earnings of US$0.95 on revenue of US$591 million. Operating margin swung to 6.9% from a negative 4.8% a year earlier.

The company said that prices continued to strengthen for food service and retail grocery store customers in the first two weeks of May, but said that casual dining demand was expected to remain soft, due to economic conditions.

Shares closed Friday at US$54.31 and were inactive premarket. The market was closed Monday for Memorial Day. The stock is up 8.3% so far this year.