Locking Lips With Gold Kist

For sheer entertainment value, it's tough to beat the analysts who follow the protein sector. Earlier this year we heard calm reassurance that bird flu wasn't going to kill the golden goose, that overproduction wasn't a problem, and that the companies were still poised to have a good year. Fast-forward a few months and it seems like it's the analysts running around with their heads cut off.

In this sea of abject analyst confusion, Gold Kist (NASDAQ:GKIS) has reported its earnings. As you might imagine, they weren't that strong. Sales were down about 7% for the second quarter, and the company posted a loss, the reverse of its gross profit a year ago. On the net income line, the company posted a loss in line with recently revised estimates.

This is pretty much a perfect storm for poultry producers like Gold Kist. Sluggish overseas demand has clipped pricing both abroad and here at home -- which makes what were once called "rational" capacity expansions across the industry seem a little more problematic now. What's more, energy, freight, packaging, and feed costs haven't eased up, so these companies are pretty stuck between the anvil and the hammer right now.

While Gold Kist is the largest private-label supplier around and a bit more sensitive to spot prices than say Pilgrim's Pride (NYSE:PPC) or Tyson (NYSE:TSN), the ongoing move toward more value-added products should still continue to help margins -- even if you don't notice it in times like these.

And the "times like these" will pass. Just as higher protein prices encouraged capacity expansion, the tough times now are leading some to shutter those plans. What's more, if it's hard on the big publicly traded folks, you can imagine that it isn't any easier for the smaller operators. But that's why this is a cyclical business. Sooner or later, Russians will start eating more chicken again, prices will rise, and things will be looking up again.

In terms of this stock, I feel a lot like I did about SandersonFarms (NASDAQ:SAFM): These stocks were a little more interesting back when investors were willing to gnaw through their own legs to get out of these shares. That said, Gold Kist has rebounded less than its peers, so maybe there's a relative value call to be made. Either way, Fools considering these shares need to be prepared for the long haul and a few hiccups along the way.

For more fowl Foolishness:

• Gold Kist May Be Scratching Bottom
• Playing Chicken With Chickens
• Tyson Foods' Protein Woes

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).