Buckingham Serves Sanderson Farms, Tyson Foods With Neutral Ratings

Meat processors like Sanderson Farms, Inc. SAFM and Tyson Foods, Inc. TSN gained 36 percent and 20 percent, respectively, over the past year — but now is not the time to buy, according to Buckingham Research Group.  

The Analyst

Buckingham's Eric Larson initiated coverage of Sanderson Farms' stock with a Neutral rating and $122 price target. The analyst initiated coverage of Tyson Foods' stock with a Neutral rating and $82 price target.

Sanderson Farms: Cautious On Industry Capacity

Sanderson Farms has benefited over the years from low grain prices and tight meat protein supply and distribution, but the prospect of "substantial" industry capacity expansion and limited incremental benefits from feed costs should have investors concerned, Larson said in the initiation note. Specifically, the chicken industry is likely to see an 8-to-10-percent increase in capacity by the end of 2021, a 10-percent increase in pork capacity and high single-digit percentage growth in the cattle herd, Larson said. 

This poses a "structural threat" to Sanderson's favorable pricing environment, the analyst said. While the timing of new plant openings remains uncertain and is unlikely to be an issue until late 2019, investors should be "cautious in placing too much emphasis" on oversupply in 2018 and remain focused on the long-term pricing risk related to capacity growth, Larson said. 

Sanderson Farms has zero debt on its balance sheet and hoolds $420 million in cash, which does reduce any solvency risk and could be used to fund operating losses in a cyclical downtown, Larson said. Nevertheless, the risk-to-reward profile favors the downside and a worst-case scenario could send shares as low as $96, he said. 

Tyson Foods: Less Visibility Beyond 2018

Tyson Foods, similar to Sanderson Farms, has directly benefited from a favorable environment for some time, Larson said in the initiation note. While the company is expected to realize significant cost savings, any earnings visibility beyond 2018 remains "less clear," Larson said. 

With the exception of the beef segment, Tyson Foods has been operating in close to, if not ideal, conditions over the past four years, the analyst said. But a developing global supply disruption, especially in soybean meal, implies that the likelihood of feed cost headwinds for the Tyson is increasing, he said. 

Even if Tyson Foods operates under ideal conditions for the next 12 to 18 months, investors will need to consider what value they are willing to assign to Tyson Foods' stock knowing that it is near peak earnings, according to Buckingham. 

Price Action

Sanderson Farms was down 2.62 percent at $128 at the close Wednesday, while Tyson Foods was down 0.96 percent at $75.40 at the closing bell. 

Related Links:

Tyson Foods CEO Talks Tax Reform, M&A Strategy

Why Analysts Prefer Tyson Over Sanderson Farms

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