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Sanderson Farms' (SAFM) Stock Up Despite Q3 Earnings Miss

Zacks Equity Research

Sanderson Farms, Inc. SAFM posted drab third-quarter fiscal 2019 results, as both the top and bottom lines missed the Zacks Consensus Estimate. However, the metrics grew year over year. This upside may have led to the stock’s gain of 3.9% on Aug 29 following the results. Further, shares of this Zacks Rank #3 (Hold) company have rallied 27.7% in the past six months, outpacing the industry’s growth of 23.3%.

The company witnessed sluggishness in market prices for boneless breast meat produced at plants that process a larger bird for food service customers. Meanwhile, market prices for other products produced at these plants rose year over year on solid demand in the reported quarter. Moreover, average market prices for dark meat, jumbo wings and chicken tenders were higher as compared to the prior-year quarter.

Q3 in Detail

The company reported earnings of $2.41 per share, which missed the Zacks Consensus Estimate of $2.74. However, the bottom line more than doubled year over year. 

Net sales came in at $945.2 million, which fell short of the Zacks Consensus Estimate of $965 million. Nevertheless, the top line advanced 10.9% year over year.  

Costs/Margins

Cost of sales escalated 1.3% to $824.1 million. Average feed costs per pound for poultry products fell 4.1%. Costs of soybean meal and corn went down 18% and 1.4%, respectively. Soybean meal and corn are part of the company’s primary feed ingredients. Further, SG&A expenses declined 6.4% to $52.2 million in the reported quarter.

Balance Sheet/Cash Flow

Sanderson Farms ended the quarter with cash and cash equivalents of $74.3 million, long-term debt of $30 million and total shareholders’ equity of $1,450.5 million.

Sanderson Farms, Inc. Price, Consensus and EPS Surprise

 

Sanderson Farms, Inc. Price, Consensus and EPS Surprise

Sanderson Farms, Inc. price-consensus-eps-surprise-chart | Sanderson Farms, Inc. Quote

Outlook

The company continues to anticipate prices paid for grain in the second half of fiscal 2019 to be down $32 million than that in fiscal 2018. 

Per the current USDA projections, the U.S. broiler production in the calendar year 2019 is expected to rise nearly 1.7% from 2018. However, prices for boneless breast meat produced at plants that process a larger chicken are expected to remain weak.

The company is progressing well with its operations in the Tyler facility, which is now processing at 50% capacity. Management projects Tyler to reach full capacity during second-quarter fiscal 2020.

Additionally, the company anticipates $288.4 million of capital expenditure for fiscal 2019.

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General Mills GIS currently has a long-term EPS growth rate of 7% and Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Danone DANOY presently has a long-term EPS growth rate of 7.9% and Zacks Rank #2.

Medifast MED delivered average positive earnings surprise of 5.6% in the trailing four quarters and has a Zacks Rank #2 at present.

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