Sanderson Farms (Nasdaq: SAFM), like many other agriculture-sensitive stocks such as Pilgrim's Pride (NYSE: PPC), Tyson (NYSE: TSN), and GoldKist (Nasdaq: GKIS), has had a tough year so far. Higher costs for inputs such as corn, soybeans, and freight and packaging, combined with an overseas fear of avian flu, have all added up to a miserable year for chicken companies. I've been waiting for the catalyst of an upturn in the industry's fortunes to evaluate whether this Fool should invest in the industry or not.
With Sanderson's third-quarter report Tuesday, it looks like some good news is finally in store for the chicken market, even if the current picture is not very pretty. Year-over-year revenues were up about 2% to $281 million, and the company reported a profit of $3.3 million, down 86% from last year's $24 million. The culprits, of course, were falling chicken prices and rising inputs -- soybean costs rose 6.3%, while Georgia dock chicken was down 6.8%, boneless breast was down 7.7%, and bulk leg quarters were down 22.5%.
So where is the good news in all this? The stock was up 13%, as Sanderson Farms noted improved market conditions in June and July. Production cuts and improved export demand led the company to be cautiously optimistic about an improved supply/demand balance. As well, the rise in costs of inputs seems to be slacking off, as the company lowered its grain costs estimate for the year. The company was confident enough to push through the increase to full production at its new Georgia plant, which was previously delayed earlier this spring because of poor market conditions, by October.
Since Sanderson Farms does not focus on the fast-food market, where most of the arrangements are cost plus contracts, it is more sensitive to chicken prices. Therefore, it is not surprising to see the stock price bumped up a bit when the company is seeing improved pricing. Of course, the company is attempting to mitigate the dangerous swings in prices by concentrating on value-added offerings for big businesses like Wal-Mart (NYSE: WMT), SYSCO (NYSE: SYY), and Target (NYSE: TGT), which are less price-sensitive. Still, the business is cyclical, and for all of the industry's efforts to garner a better handle on the forecasting process, it's not quite there yet.
Even with a potential upturn in the industry's fortunes ahead, this Fool is still wary, as with 31% of the float shorted, Sanderson isn't perceived by many to be out of the woods just yet. For now, this analyst is content to wait on the sidelines for another quarter and see exactly how the industry's and Sanderson's fortunes play out.
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