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Solid Poultry Products to Aid Sanderson Farms Amid Cost Woes

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Sanderson Farms, Inc. (SAFM - Free Report) has been benefiting from strength in poultry products, impressive export sales trend and strong brands. However, rising freight costs and escalating feed costs per pound remain headwinds.

A Brief Introspection

Sanderson Farms witnessed improved year-over-year sales during the third quarter of fiscal 2019 courtesy of strength in poultry products. Elevated average sales prices and increased volumes also contributed to sales growth. The company’s overall market prices for poultry products increased during the third quarter. Additionally, market prices of jumbo wings surged 37.6% from the prior-year quarter, on the back of robust seasonal demand.

These apart, the company boasts an impressive export sales trend. Gross export sales increased 19.6%, 25.8% and 2.7% in fiscal 2018, 2017 and 2016, respectively. Moreover, 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.

However, Sanderson Farms, which shares space with Pilgrim's Pride (PPC - Free Report) , General Mills (GIS - Free Report) and Tyson Foods (TSN - Free Report) , has its own share of deterrents. In fact, the company has been bearing the brunt of  high freight costs for the past few quarters. In the third quarter of fiscal 2019, higher shipping costs, increasing grower pay, and escalating costs associated with antimicrobial interventions in the plant are the primary reasons behind rise in costs. Moreover, cost of sales rose 1.3% and non-feed costs-related cost of sales increased 8.9% year over year during the third quarter. Such increases in costs may weigh on the company’s bottom line in the long run.

Further, sluggishness in market prices for boneless breast meat produced at plants that process a larger bird for food service customers, is assumed to be a headwind in the near term. Considering the scenario, the company still expects prices paid for grain in the second half of fiscal 2019 to be down $32 million than that in fiscal 2018.

Wrapping up

All said, the company is likely to benefit from its growth drivers in the near term.

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