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Why Is Sanderson Farms (SAFM) Down 13.8% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Sanderson Farms (SAFM). Shares have lost about 13.8% in that time frame, underperforming 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 drivers.

Sanderson Farms' Loss Wider Than Estimates in Q2

Sanderson Farms posted wider-than-expected loss when it reported second-quarter fiscal 2020 results. Moreover, the top line missed the Zacks Consensus Estimate.

During the fiscal second quarter, boneless breast meat market prices declined nearly 18% year over year. Moreover, average market price for bulk leg quarters and jumbo wing prices were lower by 7.8% and 23.1%, respectively.Meanwhile, Sanderson Farms witnessed a significant shift in consumer demand from food service to retail grocery store consumers amid the coronavirus crisis.

Q2 in Detail

The company reported net loss of $1.43 per share, which was wider than the Zacks Consensus Estimate of a loss of 80 cents. Sanderson Farms had reported earnings of $1.83 per share in the year-ago quarter.

Net sales came in at $844.7 million, which missed the Zacks Consensus Estimate of $872 million. The metric came in at $845.2 million in the year-ago quarter.

Costs/Margins

Cost of sales increased 12.4% to $832.3 million. Average feed costs per pound for poultry products inched down 1.1%. Costs of corn meal increased 2.8%, while costs of soybean meal declined 1.3% in the quarter. Soybean meal and corn are part of the company’s primary feed ingredients. Further, SG&A expenses rose 14.2% to $56.2 million in the reported quarter.

Balance Sheet/Cash Flow

Sanderson Farms ended the quarter with cash and cash equivalents of $61.3 million, long-term debt of $200 million and total shareholders’ equity of $1,371.4 million.

Outlook

Per the current USDA projections, broiler production in the industry during calendar year 2020 is expected to decline 0.3% from 2019 levels. The downside will be caused by the coronavirus outbreak and its adverse impacts on food service demand. In this regard, the company is likely to take certain planned production cuts at its food service units for the remaining half of fiscal 2020. Notably, management expects total production during the fiscal third and the fiscal fourth quarters to be up 2.2% and down 5%, respectively.

Apart from these, the company has been incurring increased operating costs related to higher employee expenses amid the COVID-19 outbreak. Notably, reduced production along with increased operating costs is likely to persist until situations induced by the coronavirus pandemic improve. Nevertheless, management anticipates feed grain costs to decline year over year for the remaining half of fiscal 2020.

How Have Estimates Been Moving Since Then?

Estimates review followed an upward path over the past two months. The consensus estimate has shifted 242.71% due to these changes.

VGM Scores

Currently, Sanderson Farms has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Outlook

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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