Sanderson Farms Misses Big

Sanderson Farms Inc. (SAFM) posted fiscal 2010 third-quarter results on Monday. The company’s earnings slumped 16.1% to $36.1 million or $1.55 per share from $43.1 million or $2.06 per share in the year-ago period. Quarterly earnings also came in way behind the Zacks Consensus Estimate of $1.87 per share. The lackluster performance was primarily attributable to sluggish market prices and extremely hot weather.

The company’s net sales during the quarter dipped 3.1% to $489.1 million from $504.8 million in the prior year quarter. The decline was attributable to a 1.7% reduction in average selling price of poultry products coupled with a 0.8% decline in volumes to 632.1 million pounds. Market prices in the quarter was affected by a Russian ban on US poultry products and anti dumping tariffs imposed by China.

Gross profit posted a reduction of 12.9% year-over-year to $79.3 million, while gross margin contracted 180 basis points (bps) to 16.2%. The decline was primarily caused by higher costs of labor, packaging and freight. Sanderson Farms also stated that extreme heat across its production facilities adversely affected the ability of chickens to convert feed to body weight, making it expensive to raise them.

Sanderson Farms’ expenses on selling, general and administrative heads increased 15.7% year-over-year to $24.9 million mainly due to higher bonus and stock-based compensation as well as initial costs associated with the company’s new Kinston and Lenoir County, North Carolina poultry complex. Accordingly, they recorded a 21.8% year-over-year decline in operating income to $54.4 million, while operating margin slipped 270 bps to 11.1%.

The company ended the quarter with cash and cash equivalents of $102.7 million, from $33.4 million in the year-ago period. The surge in cash balance was primarily attributable to the company’s public offering in April 2010, under which it raised $115.2 million. During the first nine months of the current fiscal, the company generated $126.3 million of cash from operations and deployed $99.4 million towards capital expenditure and $40 million towards debt repayment.

Moving forward, Sanderson Farms expects the Kinston, North Carolina-based facility to start operations in January 2011. The Zacks Consensus Estimate for the fiscal year ending August 2010, reduced 9 cents over the past month to $5.49 per share as 4 of 10 covering analysts lowered expectations. For the next fiscal, the Zacks Consensus Estimate also slipped 48 cents over the past month to $5.40 per share as 3 out of the 9 covering analysts reduced projections.

Sanderson Farms has a short-term Zacks #5 (Strong Sell) Rank and a long-term Underperform recommendation.

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