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Why Is Sanderson Farms (SAFM) Down 6.2% Since Last Earnings Report?

A month has gone by since the last earnings report for Sanderson Farms (SAFM). Shares have lost about 6.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sanderson Farms due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Sanderson Farms Q3 Earnings & Sales Fall Year on Year

Sanderson Farms posted dismal third-quarter fiscal 2018 results. Earnings in the reported quarter came in at 50 cents per share, lagging the Zacks Consensus Estimate of $1.00. The bottom line was considerably lower than $5.09 reported in the year-ago period.

Net sales came in at $852.4 million, missing the Zacks Consensus Estimate of $866 million. Moreover, the top line declined 8.5% year over year. In fact, poultry products net sales fell 11% to $790.4 million on account of lower average sales price, somewhat compensated by higher pounds of poultry sold.

Further, the results were hurt by low market prices of boneless breast meat prepared for food service customers. In fact, market prices were significantly down for boneless breast meat, jumbo wings, chicken breast tenders, bulk leg quarters and boneless thigh meat prepared at the company’s plants, which process a larger bird. The year-over-year fall in prices was partly accountable to lower chicken promotions at food service and retail grocery stores along with competition from other protein suppliers.

Costs/Margins

Sanderson Farms’ margins were affected by counter-seasonal declines in selling prices as well as increased average cost of goods sold. Cost of sales in the quarter escalated 12.8% to $781.6 million.

During the quarter, feed costs per pound of chicken processed increased 5.8% year over year and 7.7% sequentially. Average feed cost per pound of poultry products processed also rose 5.8% from the third quarter of fiscal 2017. Notably, Sanderson Farms witnessed a rise in prices of corn and soybean meal, which are its main feed ingredients.  Further, non-feed costs related to cost of poultry products sold went up 3.8% due to a rise in expenses associated with freight, labor, packaging, repairs, various fixed costs and contract grower pay among others.

Selling, general and administrative expenses went down 10.1% to $55.8 million. Operating income decreased significantly from $177.3 million to $15.1million, leading to a sharp contraction in the operating margin.

Balance Sheet/Cash Flow

Sanderson Farms ended the quarter with cash and cash equivalents of $288.3 million and total shareholders’ equity of $1,525 million.

In the first nine months of fiscal 2018, the company generated $103.9 million as net cash from operating activities. Capital expenditures during the same period were $216.6 million.

Outlook

The USDA projects chicken production to grow 2.3% in 2018. Further, competition from other protein suppliers is likely to keep market prices under pressure.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -340.35% due to these changes.

VGM Scores

Currently, Sanderson Farms has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Sanderson Farms has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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