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Why Is Sanderson Farms (SAFM) Down 3.9% Since Last Earnings Report?

Zacks Equity Research
·3-min read

A month has gone by since the last earnings report for Sanderson Farms (SAFM). Shares have lost about 3.9% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sanderson Farms due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Sanderson Farms Q3 Earnings Beat Estimates, Sales Up

Sanderson Farms posted third-quarter fiscal 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Quarterly sales increased year over year, while earnings fell from the prior-year quarter’s figure.

During the fiscal third quarter, average boneless breast meat market prices increased 3.2% year over year. However, average market price for bulk leg quarters, chicken breast tenders and jumbo wing prices fell 39.1%, 26.8% and 13.2%, respectively.

Meanwhile, Sanderson Farms witnessed significant demand from retail grocery store customers amid the coronavirus outbreak. However, it saw reduced demand from food service customers due to closures of various away from home channels amid the pandemic.

Q3 in Detail

The company reported earningsof $1.48 per share, which beat the Zacks Consensus Estimate of 7 cents. However, earnings fell 38.6% from the reported figure of $2.41 per share in the year-ago quarter.

Net sales came in at $956.5 million, which surpassed the Zacks Consensus Estimate of $927.1 million. Moreover, the metric increased 1.2% from $945.2 million posted in the year-ago quarter.

Cost of sales increased 5.1% to $866 million. Average feed costs per pound for poultry products declined 5.6%. Costs of corn meal and soybean meal declined 9.6% and 3.2%, respectively, in the quarter. Soybean meal and corn are part of the company’s primary feed ingredients. Further, SG&A expenses fell 3.1% to $50.6 million in the reported quarter.

Balance Sheet

Sanderson Farms ended the quarter with cash and cash equivalents of $66.1 million, long-term debt of $95 million and total shareholders’ equity of $1,399.3 million.

Outlook

Per the current USDA projections, broiler production in the industry during calendar year 2020 is expected to increasenearly 2.7% from 2019 levels. Also, the company resorted to certain planned production cuts at its food service units compelled by reduced demand from food service customers amid the pandemic. Incidentally, management expects total production during the fiscal fourth quarter to be down 5% year over year.

Apart from these, the company has been incurring increased operating costs related to higher employee expenses amid the COVID-19 outbreak. Notably, reduced volumes along with increased operating costs are likely to persist throughout fiscal 2020. Nevertheless, management anticipates feed grain costs to decline 0.83 cents per pound of poultry processed year over year for fiscal 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 75.29% due to these changes.

VGM Scores

Currently, Sanderson Farms has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Sanderson Farms has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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