Sanderson Beats, Loss Persists - Analyst Blog

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Laurel, Mississippi-based Sanderson Farms, Inc. ( SAFM ) once again incurred losses in the fourth quarter 2011 as margins continued to plunge due to higher feed cost, weak prices and lower demand. The company reported adjusted loss of 70 cents per share, a penny better than the Zacks Consensus Estimate. Including inventory adjustment of 27 cents, the company reported net loss of 97 cents per share during the quarter compared with the year-ago earnings of $2.08.

For fiscal 2011, net loss was $5.74 versus net earnings of $6.07 recorded in the year-earlier quarter. The poultry producer reported loss throughout 2011 owing to higher feed cost and fragile poultry market.

Total revenue in the reported quarter increased 5.8% year over year to $559.8 million, due to a drop of 5% in average sales price for poultry products that drove higher net sales and a 12.6% upside in poultry pounds sold. For 2011, revenues came in at $1.978 billion, up 2.7% year over year.

During the quarter, boneless breast-meat prices fell 19.1% from the last year quarter, while the average price for bulk leg quarters leaped 29.8%, with relatively strong dark meat prices reflecting good export demand during the year. Additionally, prices for the company's main feed ingredients corn and soybean meal surged 73% and 24%, respectively.

Cost of sales of poultry products for the quarter escalated 33.8% year over year to $562.3 million, as a result higher poultry pounds sold and substantial rise in grain costs.

The company has also completed its Kinston, North Carolina project and expects to start production by January. The higher production at the Kingston in 2012 will likely compensate the 4% production cut in other plants that the company plans to implement in January.

Financial Position

At the end of 2011, the company had cash and cash equivalent of $11.1 million, stockholders equity of $506.9 million and net working capital of $324.3 million. Total long-term debt at the end of the year was $273.7 million and total debt-to-cap ratio was 36%.

For 2012, the company expects capital expenditure to be approximately $37.6 million.

Our Take

Sanderson reported the fourth consecutive quarter of loss, but expects the headwinds to subdue in 2012. The company will tighten the supply of chicken and expects retail grocery demand to be stable. Management remains optimistic over the long term and continues to focus on growth. Moreover, we believe that a strong balance sheet bodes well for the company. Hence, we expect estimates to go up in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are pegged at $3.26 and $4.91, respectively.

On the flip side, the company expects corn and soybean meal prices to be high and demand to be weak as consumer spending remains low due to the prevailing uncertain economic environment.

Sanderson, which competes with Smithfield Foods Inc. ( SFD ), currently retains a Zacks #2 Rank (short-term Buy rating). We also reiterate our long-term Outperform recommendation.

SANDERSON FARMS ( SAFM ): Free Stock Analysis Report

SMITHFIELD FOOD ( SFD ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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