Morningstar | No-Moat Sanderson Farms Finishes a Difficult 2018, but Long-Term Thesis Intact; Shares Fairly Valued
We do not plan to significantly alter our $103 fair value estimate for no-moat Sanderson Farms after it posted fiscal 2018 earnings that approximated our full-year targets. While 2018 was a challenging year for the poultry market given lackluster food-service demand, lower competing protein prices (pork and beef), and hurricane disruptions, we continue to view our expectations for Sanderson’s normalized performance (3% sales growth and mid- to high-single-digit operating margins on average through fiscal 2027) as achievable, given chicken’s favorable health and long-term cost profile relative to competing proteins.Sanderson reported $3.24 billion in sales and a 0.9% operating margin for the year, with sales slightly ahead of our $3.22 billion mark but profitability lagging our 2% expectation. The firm’s operating income decreased more than 90% compared with 2017 results, highlighting that much of what dictates Sanderson’s fortunes--particularly feed costs, protein demand, and export conditions--are beyond the company’s control as it does not enjoy a sustainable competitive advantage based on the strength of its brands or a more attractive cost position than its peers, in our view.
For the year, overall poultry prices decreased 9%, and we expect profitability challenges to continue for Sanderson through fiscal 2019, considering competing protein prices, volatile export conditions, and abundant industry capacity (with Sanderson adding marginally to overall production through the planned opening of its new poultry processing complex in East Texas). While management was cautiously optimistic about retail features returning to normalized levels due to depressed chicken prices, near-term demand headwinds from low competing protein prices (particularly in pork) remain. With shares trading near our valuation, we suggest investors await a more attractive entry point before taking a position.
Sanderson Farms is a poultry processing company engaged in the production, processing, marketing and distribution of frozen chicken products, including processed and minimally prepared chicken. The company sells ice-packed, chill-packed, bulk-packed and frozen chicken, in whole, cut-up and boneless form to retailers, distributors, and casual dining operators, and to customers who resell frozen chicken into export markets. The company operates through: Sanderson Farms, Inc. (Production Division), which is engaged in the production of chickens to the broiler stage; and Sanderson Farms, Inc. (Processing Division), which is engaged in the processing, sale and distribution of chicken products.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.