JPMorgan Downgrades Sanderson Farms To Neutral On La Niña Impact

JPMorgan has downgraded Sanderson Farms, Inc. (NASDAQ: SAFM) to Neutral from Overweight, saying the "path to further outperformance has become less certain" due to the La Niña effect.

The brokerage said the stock has gained 23 percent since its upgrade on January 11 and outperformed the S&P 500 index (+9 percent).

"Though we remain constructive on near-term chicken fundamentals – and continue to view SAFM's management team and strategy as top-tier – we are increasingly concerned about the potential impact of La Niña on feed costs," analyst Ken Goldman wrote in a note.

The National Weather Service is forecasting a 75 percent chance of a La Niña during this fall/winter, and many independent forecasters – e.g. Weather Trends International – think the potential is even higher.

The analyst said it's tough to forecast what La Niña's impact will be on crops. But, Goldman said out-month corn futures, especially for 2017 and beyond, are more likely to rise than fall.

"If investors think corn is going up – and based on our conversations with them, we think this viewpoint is increasingly prevalent – then it will be difficult for the SAFM shares to outperform, all else equal," Goldman highlighted.

Goldman also noted Sanderson will spend more on marketing this year than anticipated and could shave as much as $0.45 from EPS.

The analyst expects $7.5 million spending in each of the next two quarters to support TV advertising around SAFM's pro antibiotics stance. The company spent $7 million in marketing during the second quarter, the highest since 2009.

In addition, Goldman said Street estimates "need to come in a bit" as even factoring SAFM's purchases of corn through July at a favorable $3.51/bushel price, the analyst arrives only $2.13 in third quarter EPS. This is $0.08 below the Bloomberg consensus estimate and $0.07 less than the Street estimate.

Goldman, who cut his price target by $1 to $95, trimmed his 2017 EPS view to $4 from $6.55. Street expects earnings of $6.99.

At time of writing, shares of Sanderson fell 3.80 percent to $89.04.