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Are Sanderson Farms – and other U.S. chicken producers – poised for a big jump in earnings in 2017?
While Sanderson Farms executives stopped short of making any earnings prediction at the Stephens Spring 2016 Investor Conference, their outlook had at least one analyst envisioning strong profitability in the year ahead.
Stephens Managing Director Farha Aslam, after listening to the Sanderson Farms presentation, said, “My earning per share estimate [for Sanderson Farms] for fiscal 2017 is between $4 and $5 above consensus. What do you think about my number?”
The obligatory demurral came from Sanderson Farms Chief Financial Officer Mike Cockrell, “We don’t comment on models.” He offered the following, however, without missing a beat:
“I will tell you that you can run a model that assumes grain priced at current futures prices ... and the number of pounds Sanderson is going to be producing for the balance of 2016 and 2017 ... [and ask] what kind of chicken market would need to be layered on top of that to earn $10 a share or $9.34 a share? And such a chicken market is not an unreasonable target.”
The outlook presented by the Sanderson Farms executives included the following:
Putting Aslam’s earnings model into an operational context, Cockrell said, “Our number of pounds [of chicken production] is going to be up in 2017. The Palestine operation will be running much more efficiently and at full production sometime during our fourth fiscal quarter this year . . . so it is reasonable.”
While export demand for U.S. chicken has not fully returned since the outbreaks of highly pathogenic avian influenza in 2015, the prices for leg quarters are much improved.
“Exports are much better now than in our first fiscal quarter,” Butts said. “We netted about 15 cents per pound for leg quarters in November, December and January. Leg quarter prices have doubled that level now, selling in the low 30s.”
A reopening of China to U.S. chicken exports would potentially provide a market for chicken paws, which are currently diverted to offal production. In recent years the value of the paws market to China reached $50 million a year.
The political groundwork for reopening China is under way with proposal and rulemaking that would approve four plants in China to ship fully-cooked chicken to the U.S. in cans to be sold at retail. While the demand for the Chinese chicken in the U.S. might be negligible, the Chinese are probably more interested in the effect the U.S. approval might have on their exports to other countries.