Firmer Chicken Pricing Encourages CLSA To Upgrade Sanderson Farms To Buy

CLSA has upgraded Sanderson Farms, Inc. (NASDAQ: SAFM) to Buy from Outperform, as it gains confidence that the company can sustain its margins in FY17.

"The outlook for chicken margins has improved and the trough in 2017, if we can still call it that, now has a strong safety net," analyst Jeremy Scott wrote in a note.

While not completely out of the woods, Scott said ideal weather and soil moisture conditions are driving corn and soymeal prices lower and providing a stronger safety net for margins in 2016 and 2017.

"A $0.10/bu move in corn is equivalent to $0.33/share, whereas a $10/ton move in soybean meal is equivalent to $0.34/sh," Scott continued.

Meanwhile, the analyst is encouraged by firmer breast-meat pricing despite softer food-service demand and the surge of beef supplies.

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"While leg quarters have softened as export markets have yet to turn, we see reason for optimism on reduced Brazilian supplies, import needs from China, and more favorable FX (US$ vs BRL)," Scott added.

The analyst also raised his FY16 EPS estimate to $7.10 from $6.79 and in FY17 to $5.57 from $4.02. Scott also hiked his target price to $113 from $107.

At time of writing, shares of Sanderson Farms were up 1.48 percent at $93.16.

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