Sanderson Farms Downgraded After Stock Adds 40% In 3 Months

After a 40-percent gain in three months, analysts at Mizuho Securities feel it is prudent to no longer hold a bullish stance on Sanderson Farms, Inc. (NASDAQ: SAFM). The firm's Jeremy Scott downgraded Sanderson Farm's stock rating from Buy to Neutral but with a price target boosted from $151 to $160.

At current levels, Sanderson Farm's stock better reflects the near-term fundamentals in the chicken market, Scott highlighted. Specifically, breast meat pricing continues to be weak. As a whole, chicken fundamentals are strong. At the same time, new large-scale capacity plans were announced by Tyson Foods, Inc. (NYSE: TSN) and Simmons Foods in the tray pack arena, which could "refresh the bear case."

"While tray pack is an under-served segment, and these additions may be long overdue, the quick sequence of announcements may muzzle the industry narrative of tight, rational supply," the analyst explained.

There is the opportunity to return to a bullish rating, the analyst continued. But before doing so the company would need to show evidence that "competing protein dynamics can help support the incremental supply." Also, cow-calf operators are likely to be leaning toward a slowdown in herd growth, and if there is any accelerated liquidation, it would pressure pricing in 2018 by adding more beef into the market. However, it may also add a layer of support for chicken prices in 2019 and 2020.

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