Goldman Downgrades Sanderson Farms To Sell

Goldman Sachs’ Adam Samuelson downgraded the rating on Sanderson Farms, Inc. SAFM from Neutral to Sell, while maintaining the price target at $75.

Downside Risk

Samuelson believes that there could be 17 percent downside to the stock from its current levels, as compared to the expectations of an average 4percent increase in Goldman Sachs’ Agribusiness coverage.

“Recent outperformance is overdone, in our view, as lackluster export demand and well-supplied domestic markets are likely to constrain big bird deboning margins over the course of 2016, even though CY4Q15 marked a seasonal low in profitability,” Samuelson elaborated.

Recovery In 2016?

Also, the analyst expected the “recovery” in 2016 to be muted, given that the various fundamental issues that led to oversupply in the big bird markets in 2015 still persist.

Among these issues is the persisting weakness in the export markets, driven by a strong U.S. dollar and lower oil prices, high domestic supply of competing beef and pork products and robust 2.5-3.0 percent “big bird-driven chicken production growth.”

According to the Goldman Sachs report, “While Avian Influenza trade bans have eased, we do not see their absence as enough to rebalance the domestic market.”

In addition, Samuelson mentioned that the deceleration in egg sets seen in CY4Q15 was unlikely to be indicative of new industry discipline. The analyst believes that this could be a sign of return to normal seasonality, from the elevated CY4Q14 levels.