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Bear of the Day: Sanderson Farms

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Previously, we’ve chronicled some of the winners and losers from the recent trade war that has seen multiple rounds of tariffs enacted on imports to the U.S. and retaliatory tariffs imposed by other nations on U.S. exports. Our Bull of the Day today is Alcoa (AA - Free Report) , which has seen increased prices and reduced foreign competition enhance results and future projections.

Unfortunately, on the other side of the coin are companies who have seen their margins squeezed by higher costs and lower selling prices. Sanderson Farms (SAFM - Free Report) is one of the unlucky ones.

One group of significant losers in the trade war seem to be food producers who have seen prices fall on trade uncertainty and costs rise, especially the prices of steel and aluminum packaging, as well as a recent uptick in feed prices. Simultaneously, they have experienced reduced orders from overseas and lower prices amid an oversupply of domestic protein.

Sanderson Farms reported disappointing results in August, earning just $0.50/share versus estimates of $1.08/share. Earnings would have been $0.58/share except for an $0.08/share accrual for contributions to an employee compensation plan. It was a huge miss, especially since the Zacks Consensus Estimate had already been cut by more than 60% in the past 90 days from $3.21/share. In Q2 2017, the company earned $5.21/share. SAFM is a Zacks rank #5 (Strong Sell).

Sanderson cited low domestic prices for its chicken products and increased feed costs and corn and soybeans rebounded off multi-year lows during the quarter. Feed costs increased 8% over the prior year period and “other” costs - including transportation and packaging - were up 4%,

Though the company did not specifically cite tariffs as the cause, it’s likely that increased supply of meat that would ordinarily have been exported was a contributing factor to the lower prices received.

Shares in Sanderson Farms have been slumping the past year, recently trading around $99/share, well off their 52-week highs of $176/share.

Food products, especially proteins, are a textbook example of the economic principle of substitution – grocery customers who find the selection or prices of a given product unsatisfactory are presented with a wealth of choices, usually in an adjacent space in the same cooler. The ease with which consumers can simply pick up a package of beef or pork makes pricing power at the retail level difficult to achieve.

Food companies routinely face challenges in the form of highly variable input prices and sales prices, as well as weather issues and seasonal changes in consumer demand. In general, they have become adept at managing the factors they cannot control with input price hedging and creative outputs that maximize profits. In the case of tariffs, however, Sanderson Farms is on the wrong side of the prevailing trends in both input cost and end prices and it could be rough sailing until the trade situation is worked out.

With wholesale food producers struggling, companies on the periphery of the Food industry should be more interesting to investors, like SodaStream Intl (SODA) a Zacks Rank #1 (Strong Buy) or The Chef’s Warehouse (CHEF - Free Report) , a Zacks Rank #2.

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