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Sanderson Farms Loses Sheen on Soft Demand & High Costs

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Companies operating in the U.S. meat and poultry manufacturing space are in dire straits, thanks to concerns surrounding high input costs, soft demand and volatility induced by an unstable tariff environment. While few companies are managing to survive such difficulties on brand strength and savings efforts, others like Sanderson Farms, Inc (SAFM - Free Report) are struggling to stay afloat. This renowned chicken products company’s shares tanked around 29.7% in the past year compared with the industry’s decline of 2.4%. That said, let’s take a closer look at the factors plaguing this Zacks Rank #5 (Strong Sell) company’s performance and see if there are any possibilities of a revival.

Soft Demand Triggers Low Prices

Sanderson Farms witnessed soft demand for big bird boneless breast meat during the third quarter of fiscal 2018, which led to lower prices. In fact, market prices were significantly down for jumbo wings, chicken breast tenders, bulk leg quarters and boneless thigh meat. The year-over-year fall in prices was somewhat accountable to lower chicken promotions at food service and retail grocery stores along with competition from other protein suppliers. Due to such deterrents, poultry products net sales fell 11% to $790.4 million in the third quarter.

Rising Input Costs & Other Challenges

Another significant aspect of worry for Sanderson Farms is mounting cost of sales. During the third quarter, Sanderson Farms’ cost of sales flared up 12.8% on account of elevated feed cost per pound processed as well as an increase in non-feed costs. Markedly, feed cost in flocks processed climbed $0.015 per pound year over year and non-feed related cost of goods sold went up $0.014 per pound.

Additionally, the company is facing increased freight costs for the past few quarters, which persisted in the third quarter. A rise in freight and ship costs along with increased grower pay and escalated costs associated with antimicrobial interventions in the plant led to a rise in non-feed costs.

Such trends may continue to aggravate input cost burden. This along with counter-seasonal declines in selling prices puts the company’s profitability at risk. Besides Sanderson Farms, high input and freight costs have been weighing on the performances of several players in the U.S. meat industry such as Pilgrim’s Pride Corporation (PPC - Free Report) , Hormel Foods Corporation (HRL - Free Report) and Tyson Foods (TSN - Free Report) .

Apart from these, new products and firms entering the space have raised the bar of competition for Sanderson Farms. Moreover, the tariff rates volatility induced by the trade war with China puts the company’s exports sales at risk and is also likely to trigger excess supply conditions.



 

Any Hopes of Revival?

We note that management is resorting to aggressive efforts to strengthen the company’s product portfolio by adding new items to cater to consumer demand. However, until matters take a turn, we prefer to remain on the sidelines.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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