Sanderson Farms' Higher Costs
The improved efficiencies at Sanderson Farms, Inc.’s (SAFM - Snapshot Report) poultry complexes in Georgia and Mississippi, along with the new facility in Waco, Texas, should enhance improve unit operating costs and increase production levels in fiscal 2008. However, grain costs are expected to continue increasing in 2008. As a result, the construction of a new complex in Kinston, North Carolina has been delayed. The Hold rating is maintained.
The company’s new facility, which opened during the fourth quarter of 2007, added 18 percent to the existing capacity. Though construction is currently being delayed, the company plans to build a new feed mill, poultry processing plant, and hatchery in Kinston, North Carolina. The new complex at its full capacity will be equipped to process 6.7 million pounds of dressed poultry meat per week.
Due to the company’s volatile earnings and loss reported in fiscal 2006, the stock is best valued on a price-to-sales basis. During the last five years, the stock has traded in the range of 0.33 to 0.94 times sales. There is considerable commodity risk involved with the production of chicken products, both on the pricing of end-products and the costs of feed, processing, and storage. With stock currently trading at 0.54 times sales, the target is a 0.60 price-to-sales ratio or $48 per share.