Why Analysts Prefer Tyson Over Sanderson Farms

Showing its preference for Tyson Foods, Inc. TSN over Sanderson Farms, Inc. SAFM, KeyBanc Capital Markets initiated coverage of the former with an Overweight rating and the latter with a Sector Weight rating.

The firm's price target for Tyson Foods is $82, while it has no price target for Sanderson Farms — the norm for its Sector-Weighted stocks.

Tyson Poised For Above-Average Volume, EPS Growth

Analyst David Carlson believes Tyson Foods is positioned to drive above-average volume and high-single digit, plus, earnings per share growth over the next two to three years. The analyst said the incremental $400 million cost savings the company announced may not be fully reflected in the current stock price due to investor skepticism concerning it.

However, the analyst believes the company will achieve the full amount of the outlined cost savings, and potentially at a faster pace than expected over the next three years.

KeyBanc said it expects the AdvancePierre acquisition to help generate meaningful long-term earnings per share growth, as much as 40-50 cents by 2019/2020. The firm also expects the long-term guidance to be raised in several key segments, with the cost savings estimated to result in a 130 basis points margin tailwind at the Prepared Foods segment and a 40-50 basis points increment at the Chickens segment through 2020.

"We anticipate volume growth coupled with strong margin performance in FY18 will result in long-term guidance being raised to 12-14% at the Prepared Foods segment (normalized range of 10-12%) and 10-12% at the Chicken segment (normalized range of 9-11%)," the firm added.

See also: Why Tyson Foods' Stock Offers Healthy Upside

Likelihood Of Success Continuing At Sanderson Farms Is Waning

KeyBanc said 2017 has been a banner year for Sanderson Farms, although the likelihood of recent success continuing appears to be waning. The firm noted that the company benefited from a number of a number of favorable industry dynamics, including strong retail demand for chicken, lackluster production, mid-single digit, plus, price increases, lower dollar and lower input costs.

These factors, according to the firm, helped drive an 82 percent year-over-year increase in earnings per share in the year-to-date period through the third quarter of 2017, and in turn a 59 percent increase in stock price, since the beginning of July.

However, the firm is not very confident that the success of 2017 could be replicated, although believing fiscal-year 2018 results could still be strong. The muted expectation is premised on recent data showing acceleration in egg set and chicks placed, which suggest more adequate supplies early in 2018.

The firm said this could further pressure prices and producer profitability. Additionally, the firm noted that chicken prices have moderated and grain costs have increased, exerting pressure on gross margin in the latter half of 2018.

Therefore, the firm said it is below-consensus in terms of its fiscal year 2018 earnings per share estimate, premised on 4-5 percent revenue growth, driven by mid-single-digit volume growth, relatively flat chicken prices and a 180-basis-point contraction in gross margins.