Negative Headlines Impacting Sanderson Farms Create Buying Opportunity

D.A. Davidson’s Eric M. Gottlieb believes Sanderson Farms, Inc. (NASDAQ: SAFM)'s price fixing accusations and Georgia Dock issues appear to be worse than they actually are.

Gottlieb upgraded the rating on the stock to Buy, while lowering the price target from $103 to $98.

Negative Headlines

“Over the past few weeks, the GA dock price has come under much scrutiny as to its accounting methods and accuracy,” the analyst explained.

The Georgia Department of Agriculture has now asked chicken producers to submit attestations and affidavits regarding the accuracy of information. However, less than half the producers that usually contribute to Georgia Dock have done so.

Gottlieb mentioned that this could be due to the “short turnaround on the new standards” and the fact that “the metric was suspended for the first time in over 40 years,” although the metric is expected to continue once the internal counsels of all companies sign off on the new measures.

Sanderson Farms’ share price has declined nearly 20 percent since early September when class actions emerged, accusing 90 percent of the industry of having conspired to fix prices since 2008.

“Much of the concern was driven by the GA dock price's consistency, a change among some producers to employ a buy vs. build strategy, and the sharing of industry profitability and production data via AgriStats,” the analyst stated.

Things Are Better Than They Seem

Gottlieb believes the industry is now more disciplined with regard to production, and he expressed doubts whether any conspiracy actually occurred to artificially curb production.

The analyst also pointed out that there was “a lot of misunderstanding” pertaining to how the Georgia Dock is used. Even if there was a change in metric, “chicken's actual price paid will be fairly unchanged, as just the base metric will change.”

In Monday's pre-market session, Sanderson Farms shares were seen up 1.48 percent at $83.17.