August 23, 2011

Sanderson Farms drops as analyst predicts larger than forecast loss

Shares of Sanderson Farms Inc. dropped 4% on Monday (Aug 22) as an analyst predicts the poultry producer's third-quarter loss will be bigger than Wall Street's forecast due to falling chicken prices and higher feed costs.

Jefferies analyst Jeff Farmer estimates Sanderson will lose US$1.25/share in the quarter, compared with Wall Street's expectations for a loss of US$0.86/share, according to FactSet. Farmer says the loss will likely be driven by an 11% decline in chicken prices and a 36% increase in feed costs, on-year.

Poultry companies have come under pressure as restaurants order fewer chickens due to a decline in consumer spending. This has led to an oversupply, which keeps prices depressed. At the same time, feed costs have been rising.

Farmer said in a client note that it is likely that the Wall Street estimate will change for the worse as it gets closer to Thursday, which is when Sanderson is scheduled to report its quarterly results.

The analyst also thinks Sanderson will incur a quarterly inventory write-down of US$10 million or more. This would be above its second-quarter write-down of US$6 million, but less than its first-quarter write-down of US$22 million.

Farmer reaffirmed a "Buy" rating and US$55 price target for the Laurel, Miss., company, however, since "Our work suggests that chicken prices have likely troughed -- historically a bullish sign for SAFM shares."

Sanderson Farms' stock fell US$1.66, or 4.1%, to US$38.78 in morning trading. The shares have traded in a range of US$38.17 to US$49.47 over the last year.