Morningstar | Sanderson Posts Weak 3Q Results as Lower Poultry Prices Crimp Profits
Despite a sharp earnings dip, we do not plan a large change to our $111 fair value estimate after Sanderson Farms reported third-quarter results. Year-to-date net income fell 49% to $105 million as poultry prices and feed costs weighed. Still, the results do not alter our view of Sanderson's normalized performance (3% sales growth and high-single-digit operating margins on average through fiscal 2027), with short-term headwinds yielding to chicken's more favorable health and long-term cost profile.Lackluster demand depressed prices by 15%, including weak food-service demand for boneless breast meat. Management highlighted restaurants' and retailers' decisions to feature beef and pork in promotions as a significant factor leading to low chicken demand, as high availability of both competing proteins enabled low-price promotions particularly in pork, where tariff battles have led to industry oversupply that should be exacerbated by coming plant openings. Competing proteins' impact on chicken shows the degree to which Sanderson’s fortunes depend on forces outside its control, a factor contributing to our no-moat rating. While we believe chicken's relatively low cost and health profile will support domestic long-term demand versus beef and pork (around 4% sales growth after conditions normalize against roughly 3% for beef and pork), the other proteins create volatility.
Sanderson's 2% third-quarter operating margin lagged mid-single-digit marks for the most recent period at Pilgrim's Pride's U.S. unit and Tyson's chicken operation. This aligns with our expectations, as Sanderson's skew to larger birds creates greater profit potential in strong markets (its 13% fiscal 2017 operating margin beat Pilgrim's 12% U.S. result and Tyson's 10% chicken segment mark) but introduces risk. At current prices, we consider Pilgrim's Pride to be the most attractive of the three, as its balanced portfolio stands astride short-term headwinds and stronger long-term demand.
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.
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