Source: MEATINGPLACE, 10/17/14

Shares of chicken producers fell sharply on Thursday after investors took a negative view of comments made by Sanderson Farms executives on industry production levels.

Several Wall Street analysts called the stock sell-off an overreaction.

Sanderson CEO Joe Sanderson, speaking at the company’s investor day, observed that egg set numbers are up at a time when chicken demand typically declines heading into Thanksgiving and Christmas. Investors thought Sanderson was implying that the industry was acting irrationally, J.P. Morgan analyst Ken Goldman said in a note to clients he titled “Tarred and Feathered: Chicken Stocks Hit Hard.”

Sanderson said the company would gain 15 percent more production capacity when the plant it is building in Palestine, Texas, comes on line in 2015. The CEO said the company’s stock should be worth more once that production is added, but investors interpreted his calculations as suggesting the stock is overvalued, Goldman said.

Noting Tyson Foods stock fell 4 percent, Sanderson fell 10 percent and Pilgrim’s Pride fell 18 percent, “we think the reactions were overdone,” Goldman said. He advised buying Tyson, which he rates “overweight.”

BMO Capital Markets analyst Kenneth Zaslow said he came away from Sanderson’s presentation thinking that chicken margins have a greater probability of remaining at near-record levels in 2015.

“Protein stocks had a negative visceral reaction to Sanderson’s commentary on near-term breast prices (or lack of fall production cuts) as well as its production forecasts, its well-documented desire to build capacity, and its view that its stock is fairly valued at $80/share,” Zaslow wrote in a note.

BB&T Capital Markets analyst Brett Hundley said investment bears latched onto to Sanderson Chief Operating Officer Lampkin Butts’ comment that this year’s earnings environment represents a “spike year” in profitability, even though Sanderson Farms expects another strong earnings year in 2015.

Stephens analyst Farha Aslam said shares of the chicken companies will likely remain under pressure until breast meat prices bottom and bounce seasonally in the first quarter of 2015.

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