BB&T Capital Markets: Still Cautious On SAFM’s FY’11

Analysts at BB&T Capital Markets reiterate their "hold" rating on Sanderson Farms Inc

, while reducing their estimates for the company. According to BB&T Capital Markets, “SAFM reported Q3’10 EPS of $1.55, below our estimate of $1.78 and consensus of $1.87. Revenues were roughly in-line with our forecast, however, gross margin was 16.2% - a decline of 183 bps yr/yr and 329 bps below our estimate. The weaker-than-expected margin performance was mainly the result of very high temperatures across much of the company’s production area, resulting in lower live weights and increased production costs.” “Pricing has been strong during August, lagging lower production levels related to hot weather this summer. We believe that stronger pricing in Q4 will help to offset higher production costs, particularly for that of SAFM, which is more exposed to heat and lower resulting weights, given its geographical production area…..We remain cautious on FY’11, considering the industry supply build, still uncertain demand environment and rising feed costs. On its call, management exhibited a cautious attitude, explaining that current pullet placement levels are surprising and are indicative of future weekly egg sets in the 115M-120M range, a level that, absent solid demand, could lead to significant price pressure. We calculate that egg sets at such a level could lead to yr/yr production increases in the mid-single digits. The demand outlook remains one of uncertainty. The overall export environment continues to exhibit instability, while the U.S. food service channel remains lackluster. Retail has continued to perform well, however,” the analysts add. BB&T Capital Markets has lowered its EPS estimates for FY10 and FY11 from $5.55 to $5.31 and from $5.20 to $4.70, respectively.