Leave the Spam on the shelf and grab yourself a chicken leg instead.
That may sum up the investment thesis of some agribusiness analysts who follow two of the biggest U.S. meat processors, Hormel Foods Corp. and Sanderson Farms, Inc. Both companies on Aug. 25 reported weaker than expected quarterly results, and shares of both fell sharply.
But it looks like it’s time to jump back into chicken, according to Stephens Inc. analyst Farha Asham. She raised her rating on Sanderson Farms shares to “overweight” from “equal weight” and hiked her share price outlook, saying a months-long chicken market slump appears to have bottomed.
The poultry industry’s profits “hit a nadir” during July and are beginning to rebound, Asham said in an Aug. 26 report. Weekly egg sets, a gauge of the poultry supply outlook, are down 6.6 percent from levels a year ago, and production cuts “are anticipated to accelerate in the fall,” she said.
For Hormel, the maker of Spam luncheon meat as well as Dinty Moore stew and Jennie-O turkey, financial prospects have grown cloudier amid a weak economy and soaring corn prices that have pushed animal costs higher.
Asham lowered her estimates for Hormel’s share price and its fiscal 2012 profit, noting that grain costs comprise most of the key costs for the company’s turkey business.
Hormel’s hog prices were up nearly 18 percent during the most recent quarter, compared with the same period a year earlier, Asham wrote. While Hormel expects lower hog prices during the current quarter, “expectations are for pork operating margins to remain lower than the profitability seen a year ago,” she said.
Asham’s outlook offers mixed news for beef and pork producers. Poultry producers’ recent cutbacks likely will reduce supplies of cheaper meats competing with steaks, chops and other cuts in the supermarket. But the hog industry’s profits look to remain under pressure with corn above $7 a bushel and harvest prospects for this year’s U.S. crop shrinking.
Near midday Aug. 26, corn futures for December delivery in Chicago rose 18 ¾ cents to $7.62 ¼, after reaching $7.64 ¾, the highest price for a December contract since July 2008.
Asham cut her estimated target for Hormel shares over the next 12 months to $29 from $32, and reduced her forecast for the company’s per-share profit in fiscal 2012 to $1.78 from $1.88, noting higher input commodity costs in turkey and grocery products businesses. She expects Hormel to earn $1.73 in 2011.
Shares of Austin, Minn.-based Hormel rose 24 cents to $26.60 near midday Aug. 26. The stock is up 3.8 percent this year.
Profit for Sanderson Farms, the fourth-largest U.S. poultry processor, probably will improve next year as the industry’s production cuts lead to higher breast, leg and wing prices. During the previous quarter, wholesale prices for boneless, skinless chicken breasts averaged $1.19 a pound, down 24 percent, though prices more recently have climbed about 6 cents, Asham said.
Sanderson Farms is expected to earn $2.18 a share in fiscal 2012, after losing $5.05 in 2011, Asham estimated. She raised her 12-month target for the company’s shares by $3, to $48.
In midday trading Aug. 26, shares of Laurel, Miss.-based Sanderson Farms fell 49 cents to $38.93. The stock is down 0.6 percent this year.
Still, corn prices probably remain high amid prospects the 2011 crop will fall short of expectations, Asham said, adding she expects Sanderson Farms’ costs for the grain to exceed $7 a bushel through fiscal 2012.
“Expensive grain is expected to be a challenge for Sanderson, but the elevated prices will also be a catalyst for industry product cuts,” Asham said.
During the three months ended July 31, Sanderson Farms’ fiscal 2011 third quarter, the company posted a net loss of $55.7 million, the company said Aug. 25. A year earlier, Sanderson Farms had net income of $36.1 million. Sales in the most-recent quarter rose 4.5 percent to $511.2 million.
Hormel had net income of $98.5 million in its previous quarter, up 15 percent from a year earlier, but disappointing sales volume and weaker than expected performance in some businesses contributed to pressure on the company’s shares.