Having heard from the likes of Tyson Foods (NYSE:TSN) and Pilgrim's Pride (NYSE:PPC), I think most investors already know the score in the poultry world. Feed prices (a key cost input) are down, but poultry pricing has fallen off as well. The latest pullet producer to report, GoldKist (NASDAQ:GKIS), seems to have suffered a real clunker of a quarter.
Sales were down 10% as reported, and even adjusting for the extra week in the year-ago quarter renders a negative 3% result for this quarter. While the company did manage to ship more pounds of poultry, the drop in realized prices more than overwhelmed that. As you might suspect, operating leverage cuts both ways, and profitability dropped along with revenue. Operating margin worsened by a bit, and net income dropped more than one-fourth from the year-ago level.
GoldKist management didn't seem to have a whole lot of new things to say. Feed prices were lower, but forward contracts kept them from realizing the full benefit. Poultry export demand is still very strong, but more sluggish demand in the food-service chain hurt domestic results. Remember, GoldKist has a good-sized private label operation, selling to companies like Wal-Mart (NYSE:WMT), Albertsons (NYSE:ABS), Wendy's (NYSE:WEN), and SYSCO (NYSE:SYY). If there's really weakness in the demand channel, GoldKist definitely feels it.
What I don't understand is the apparent magnitude of the earnings miss this quarter. According to what I see online and in print, the average estimate for the quarter was $0.77, whereas the company reported $0.49. Perhaps I'm missing something somewhere (like analysts using an operating number instead of a net number), but boy, does that look like an unusually large miss for this sort of business.
At the bottom line, this is another company with very little control over its costs (feed and energy, for instance) or final pricing. That's a tough foundation from which to build a sustainable competitive advantage and long-term shareholder value. While the stock looks pretty darn cheap on a P/E basis, I'd make certain that "E" part won't get pecked away before putting any of my nest egg into this stock.
For more fowlish Foolishness:
- Tyson Foods' Fowl Fortunes
- Pilgrim's Pride Investors Turn Chicken on Outlook
- Sanderson Farms Crosses the Street
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
