QUOTE AND NEWS
TheStreet.com  2 hrs ago  Comment 
NEW YORK (TheStreet) -- Sanderson Farms shares are down -5.2% to $90.12 on Tuesday after the company reported third quarter earnings of $3.30 per diluted share, 50 cents short of Bloomberg polled analysts' expectations for the quarter. Click...
Wall Street Journal  4 hrs ago  Comment 
Sanderson Farms Inc.'s fiscal third-quarter profit increased 12%, driven by higher sales and poultry product prices.
Motley Fool  Jul 16  Comment 
There are some good reasons to bet on chicken-related assets. What's the outlook for Sanderson Farms and Industrias Bachoco?
SeekingAlpha  Jun 2  Comment 
By Zacks Investment Research: Sanderson Farms, Inc. (SAFM) is benefiting from the record high beef prices as more consumers switch to chicken. This Zacks Rank #1 (Strong Buy) recently blew by the Zacks Consensus in the fiscal second quarter by...
SeekingAlpha  May 30  Comment 
Sanderson Farms, Inc. (SAFM) Q2 2014 Results Earnings Conference Call May 29, 2014, 11:00 PM ET Executives Joe F. Sanderson, Jr. - Chairman and Chief Executive Officer Mike Cockrell - Chief Financial Officer and Treasurer Lampkin...
Benzinga  May 29  Comment 
Sanderson Farms (NASDAQ: SAFM) shares gained 2.70% to reach a new 52-week high of $90.02 after the company reported a strong rise in its fiscal second-quarter profit. ATRION (NASDAQ: ATRI) shares touched a new 52-week high of $322. ATRION...
Wall Street Journal  May 29  Comment 
Sanderson Farms Inc. said its fiscal second-quarter profit more than doubled as demand grew and key costs declined.
TheStreet.com  May 29  Comment 
NEW YORK (TheStreet) -- Shares of Sanderson Farms Inc. are up 3.81% to $87.66 in pre-market trade after the poultry producer reported second fiscal quarter results and six months ended April 30, 2014. Net sales for the second quarter of fiscal...
Benzinga  May 29  Comment 
Sanderson Farms (NASDAQ: SAFM) reported a strong rise in its fiscal second-quarter profit. Sanderson's quarterly profit surged to $51 million, or $2.21 per share, versus a year-ago profit of $24.4 million, or $1.06 per share. Its revenue...
Agrimoney.com  May 29  Comment 
Poultry group Sanderson Farms reports a doubling in profits, helped by a switch by customers to chicken from high-priced beef and pork




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Sanderson Farms (NASDAQ:SAFM) is the fourth largest chicken producer in the United States processing 397 million chickens and selling over two billion pounds.[1] The company earned $1.79 billion in revenue and $43 million in net income in 2009.[2]

Approximately 88% of Sanderson Farms's income come from packaged raw chicken. The company focuses on sales of raw chicken free of additives, such as salt or water, that other competitors inject into fresh chicken. The remaining 12% of income comes from prepared foods, such as breaded chicken strips and chicken fajitas. These products can be sold at high margins, even in times of rising commodity prices, because the company can pass a higher percentage of input costs onto consumers who are willing to pay a premium for the convenience of prepared products.

Sanderson Farm's profitability is highly dependent on feed costs, as they make up 36.8% of the total cost of sales. Significant increases in the costs of soybeans and corn, the main components of chicken feed, have reduced the company's profit margins by adding 6 cents per pound of chicken to the company's costs.

Company Overview

Sanderson Farms operates in three primary segments: production, processing, and foods:[3]

Production

Sanderson Farms is a vertically integrated poultry manufacturer. Its production segment encompasses all steps in chicken production, containing operations in hatching egg production, hatching, and feed manufacturing. The company's chicken operations encompass 7 hatcheries, 6 feed mills and 8 processing plants. Sanderson also has contracts with operators of approximately 576 grow-out farms that provide it with sufficient housing capacity for its operations and also has contracts with operators of 180 breeder farms.[1] After the chicks hatch, Sanderson Farms transports them to one of over 500 family farms that are contracted to raise the chickens to marketable age. The production segment posts no revenue from sales, but is rather only an intermediate step in Sanderson Farms's total meat production process.

Processing

Sanderson Farms processes chicken in three main product lines. The first line, frozen whole chickens, comprises around 10% of total sales. The second line, chill packs, comprises approximately one-third of total sales. This line is intended for retail sale and consists of fresh chicken parts that have been deep chilled and packaged in individual trays under the Sanderson Farms label. The third line, fresh bulk packs, comprises about 40% of total sales. This line is intended for food service consumers and consists of chicken pieces processed to customers' specifications. A fourth product line, non-value added unprocessed chicken, comprises less than 1% of total sales.

Foods

Sanderson Farms's foods segment comprises roughly 12% of total sales. The food segment produces over 100 different prepared food items to regional and national food service customers. Products include chicken products and frozen entrees, such as chicken fajitas, chicken dumplings, chicken stir fry, chicken fingers, lasagna, seafood gumbo, shrimp creole and other specialty products. As items produced in the foods segment are the most processed, they offer the highest profit margins of all of Sanderson's Farms products.

Business Growth

FY 2009 (ended October 31, 2009)[2]

  • Net sales increased 3.8% to $1.79 billion, which resulted from an increase in the pounds of poultry products sold of 2.8% and an increase in the company’s average sales price of poultry products of 1.4%.
  • Net income improved to $82 million compared to a net loss of $43 million in the previous year.

Trends and Forces

Rising Feedstuff Prices Cut Sanderson Farms's Margins

Sanderson Farms is heavily dependent on favorable pricing of feedstuff, such as corn prices and soybeans, as feed makes up to 36.8% of the cost of chicken production. Corn prices have risen sharply since the beginning of 2007 as ethanol producers have increased their demand for the commodity (rising oil prices, in turn, have increased demand for ethanol). Corn is also the main input for many other products such as high fructose corn syrup, and so it has been in increasing worldwide demand. Sanderson Farms engages in various hedging activities to "lock in" current prices and protect itself from price increases. It does this by buying forward grain contracts at current prices. This means the company is protected in the case of raising prices, but is also liable in the case of falling prices because it will continue to pay the contracted rate. Any long-term, significant increase in feedstuff prices has the potential to seriously depress margins and reduce profitability.

Sanderson Farms's Transition Towards Prepared Food Will Increase Margins

Sanderson Farms is looking to increase revenue from its foods segment (just over 12% of revenues). These products carry a higher margin than fresh chicken, because they reduce customer handling, cutting labor, and capital costs. Rising commodity prices factor into the price that customers must pay for their chicken, but these input costs cannot be passed on in their entirety without decreasing revenue. By eliminating an extra step in the preparation process, Smithfield can pass a higher percentage of production costs onto the food service customer as well.

Poultry Prices Fluctuate Often[4]

Though chicken prices are mostly responsive to input feed prices, they are also affected by international competition, high domestic production, seasonal fluctuations, and fear of avian bird flu. Strong export markets have been the main drivers of the poultry industry's growth, so a global surplus has an adverse effect on US producers.[5] Global surpluses can be exacerbated by domestic surpluses, the shortest of which can cause long lasting price swings.[6] Next, seasonal hatchings create a variable supply of chickens which in turn cause prices to fluctuate. Finally, fears of avian flu decrease chicken demand, and therefore chicken prices, as consumers react to outbreaks of the disease and substitute other protein sources, such as pork or beef, for chicken.[7]

For example, if a case of avian flu was found in a US chicken flock, US poultry prices would decrease for two reasons. First, American consumers would avoid buying chicken in order to avoid any possible contact with the infected meat. Next, foreign governments would prohibit imports of United States produced chicken. Combined, these two effects would greatly decrease the worldwide demand for US produced chicken and chicken prices would fall. In turn, Sanderson Farms's revenues would also fall.

Competition

Sanderson Farms is currently the fourth largest chicken producer in the United States, with approximately 5% of US market share, according to company estimates. Sanderson Farms faces competitive pressure from a number of different sources:

Pilgrim's Pride (PPC) Pilgrim's Pride has the largest share in the US chicken market producing 8 billion pounds of dressed chicken.

Tyson Foods Tyson Foods has the second largest share in the US chicken market. Unlike Sanderson Farms, Tyson Foods produces beef and pork in addition to chicken. Tyson Foods's chicken segment is more heavily weighted towards value added branded products.

Perdue Farms Perdue Farms is a privately held poultry company with an 8% share in the US poultry market. Perdue Farms sells branded retail poultry primarily to customers in the eastern and southeastern United States. Perdue Farms largest customers are national restaurant chains, the U.S. military, and the national and regional distributors.

References

  1. 1.0 1.1 SAFM 2009 10-K "General Development of the Registrant's Business"
  2. 2.0 2.1 SAFM 2009 10-K "Selected Financial Data" pg. 21
  3. SAFM 2009 10-K "Products" pg. 5
  4. SAFM 2009 10-K pg. 13
  5. "Chicken prices: Gradually coming back to Earth"
  6. "Challenges and opportunities for marketing of poultry products"
  7. "Meat and Poultry Prices Rise"
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