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Sanderson Farms to Gain From Solid Poultry Prices, Costs High

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Shares of Sanderson Farms, Inc. (SAFM - Free Report) rallied 15.6% in the past three months compared with the industry’s growth of 9.7%. The company is gaining from favorable pricing, healthy demand for most poultry products and sturdy export sales.



Notably, robust performance of poultry products drove sales in the third quarter of fiscal 2019. Also, higher average sales prices and increased volumes contributed to the top line. Further, market prices of jumbo wings surged 37.6% from the prior-year quarter’s level, driven by robust seasonal demand. These factors along with strong product base and impressive export sales bode well.

Speaking of export sales, the company boasts an impressive trend. Gross export sales increased 19.6%, 25.8% and 2.7% in fiscal 2018, 2017 and 2016, respectively. Further, the company witnessed healthy export demand during the fiscal third quarter. This led to higher year-over-year average prices for other products at its food service plants.

Hurdles on Sanderson’s Path

However, the company has been grappling with high freight costs for the past few quarters. Rise in costs stemmed from higher shipping costs as well as increased grower pay and escalated costs associated with antimicrobial interventions in the plant. Notably, the metric increased slightly during the third quarter of fiscal 2019 on accounting changes. Further, cost of sales inched up 1.3% during the third quarter. Additionally, non-feed costs related cost of sales increased 8.9% year over year. Such increases in costs exert pressure on the company’s bottom line in the long run.

Moreover, Sanderson Farms witnessed sluggishness in market prices for boneless breast meat produced at plants that process a larger bird for food service customers. This is expected to be consistent in the near term. The company continues to anticipate prices paid for grain in fiscal 2019 to decline $32 million from fiscal 2018 level.

Bottom line

All said, we hope that the Zacks Rank #3 (Hold) company’s growth drivers will help sustain its momentum in the near term.

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