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Meat processors like Sanderson Farms, Inc. (NASDAQ: SAFM) and Tyson Foods, Inc. (NYSE: TSN) gained 36 percent and 20 percent, respectively, over the past year — but now is not the time to buy, according to Buckingham Research Group.   The...
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Sanderson Farms is the fourth largest chicken producer in the United States. In fiscal 2007, the company sold over two billion pounds of chicken, posting net sales of $1.5 billion and net income of $80 million.[1]

Approximately 88% of Sanderson Farms's income come from packaged raw chicken.[2] The company focuses on sales of raw chicken free of additives, such as salt or water, that other competitors inject into fresh chicken.[3] 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.[4] Significant increases in the costs of soybeans and corn (Demand for corn, spurred by ethanol production, increased corn prices nearly 60% in 2007 and early 2008.[5]), 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.[6][7]

Company Overview

Sanderson Farms operates in three primary segments: production, processing, and foods.


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. 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.[8] The production segment posts no revenue from sales, but is rather only an intermediate step in Sanderson Farms's total meat production process.


Sanderson Farms processes chicken in three main product lines. The first line, frozen whole chickens, comprises 10.3% of total sales.[9] The second line, chill packs, comprises approximately 34.4% 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.[10] The third line, fresh bulk packs, comprises 42.5% 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. Approximately $165 million of 2007 sales of these four lines is to countries outside of the US.[11]


Sanderson Farms's foods segment comprises 12.4% of total sales. [12] 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.[13] As items produced in the foods segment are the most processed, they offer the highest profit margins of all of Sanderson's Farms products.


As of fiscal 2007, Sanderson Farms had $2.5 million cash on hand on a $600 million balance sheet. Additionally, the company has approximately $100 million in long term debt.[14] Nearly $60 million of this debt matures in 2012.[15] Although net income was positive 2007, cash flows remained negative.[16] The chart to the left illustrates revenue and operating income from 2003 to 2007. Although commodities prices increased dramatically between 2006 and 2007, both revenue and operating income rose in response to Sanderson Farms's increased volume of chicken production and sales. The majority of Sanderson Farms's revenue is from the sale of chill packs and raw bulk packs. Prepared foods, however, offer the largest profit margin so the company hopes to shift a greater portion of revenues to the segment.[17]

Key Trends, Risks, 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.[18] 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 - but nonetheless the USDA expects U.S. farmers to plant 8% less corn in 2008, lowering supply and increasing prices. [19] 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 (currently just over 12% of revenues).[20] 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

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. Sanderson Farms posted international sales of only $165 million in fiscal 2007, but international competition can drive chicken prices up or down.[21] 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.[22] Global surpluses can be exacerbated by domestic surpluses, the shortest of which can cause long lasting price swings.[23] 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.[24]

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.


Sanderson Farms is currently the fourth largest chicken producer in the United States, with approximately 5% of US market share, according to company estimates.[25] In 2006, the last year for which data was available, approximately 35 billion pounds of chicken were produced in the US.[26] Of this, 2 billion pounds were produced by Sanderson Farms.[27] 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. Pilgrim's pride produced 7.7 billion pounds of dressed chicken in 2007. Pilgrim's Pride, which posted $7.6 billion in sales in 2007, is more heavily weighted to prepared foods and export sales.[28]

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, which posted $8.1 billion in sales in 2007, is more heavily weighted towards value added branded products.[29]

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.[30] Perdue Farms largest customers are national restaurant chains, the U.S. military, and the national and regional distributors.

Below is a graph detailing total US market share, by total pounds of chicken produced, among chicken producers. Pilgrim's Pride and Tyson Foods dominate the market, with over 45% combined market share. Image: chicken Market Share.jpg [31]

The following graph details relevant operating metrics for the major US protein companies:

Company Revenue 2006 ($M) Operating Income 2006 ($M) Revenue 2005 ($M) Operating Income 2005 ($M) Revenue 2004 ($M) Operating Income 2004 ($M) Operating Margin 5-year Average (%) Global Presence (# Countries Exported to) International Sales as % of Revenue 2006 (%)
Sanderson Farms (SAFM) 1,048 (-27) 1,053 113 1,095 150 7.84% 10+ 6.6%
Pilgrim's Pride (PPC) 5,200 3 5,700 436 5,400 265 3.72% 10+ 8.3%
Smithfield Foods (SFD) 11,400 279 11,200 454 9,200 254 2.47% 36+ 6-9%
Tyson Foods (TSN) 25,600 (-77) 26,000 745 26,400 925 2.63% 80+ 8.2%
Hormel Foods (HRL) 5,700 451 5,400 426 4,800 380 7.84% 40+ <4%



  1. [1]SAFM 2007 10-K, Item 5, Page 19
  2. [2]SAFM 2007 10-K, Item 1, Page 5
  3. [3]SAFM 2007 10-K, Item 1, Page 7
  4. [4]SAFM 2007 10-K, Item 6, Page 20 (100%-other costs)
  5. [5] National Corn Growers Association Futures Quotes
  6. [6]PPC 2007 10-K, Item 1a, pg.24
  7. [7]SAFM Annual Report, Page 5
  8. [8]SAFM 2007 10-K, Item 1, Page 2
  9. [9]SAFM 2007 10-K, Item 1, Page 5
  10. [10]SAFM 2007 10-K, Item 1, Page 4
  11. [11]SAFM 2007 10-K, Item 1, Page 11
  12. [12]SAFM 2007 10-K, Item 1, Page 5
  13. [13]SAFM 2007 10-K, Item 1, Page 2
  14. [14]SAFM 2007 10-K, Item 7a, Page 30
  15. [15]SAFM 2007 10-K, Item 6, Page 39
  16. [16]SAFM 2007 10-K, Item 7a, Page 33
  17. [17]SAFM 2007 10-K, Item 1, Page 4
  18. [18]SAFM 2007 10-K, Item 6, Page 20 (100%-other costs)
  19. [19]|"USDA Bets on Soy, but Farmers Like Corn"
  20. [20]SAFM 2007 10-K, Item 1, Page 4
  21. [21]|"Poultry"
  22. [22]|"Chicken prices: Gradually coming back to Earth"
  23. [23]|"Challenges and opportunities for marketing of poultry products"
  24. [24]|"Meat and Poultry Prices Rise"
  25. [25]SAFM 2007 10-K, Item 1, Page 2
  26. [26]|U.S. Broiler Industry: Background Statistics and Information
  27. [27]SAFM 2007 10-K, Item 1, Page 2
  28. [28]Wikinvest, Pilgrim's Pride
  29. [29]Wikinvest, Tyson Foods
  30. [30]Perdue Farms: Our Products and Services
  31. [www.pilgrimspride.com/investors/ppc_FACTSHEET.pdf] Pilgrim's Pride Corporate Fact Sheet
  32. [31]Wikinvest, Tyson Foods
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