- Merrill Lynch rates Buy and $28 tgt on Pilgrim's Pride (NYSE:PPC) noting the stock was off ~15% following weaker than expected results from Sanderson Farms (SAFM). While they do not cover SAFM, they believe the market is overreacting to the weak quarterly results and outlook from SAFM management. Sanderson has produced solid results in the face of rising grain prices as a result of hedging contracts, in Merrill's opinion, and now the company is beginning to experience the same tough conditions the industry has faced over the last few quarters as these contracts roll off. Firm believes the sell-off in PPC is unwarranted as there is no new news and that the tough conditions have already been priced into the stock.

They expect that incremental production cuts—announced since grain prices rallied in June—should lead to a curtailment of supply in the early fall and a bottom of the cycle in the September quarter. Firm believes the decline in supply should allow for a non-seasonal move in poultry prices over the next few months, as supply and demand move into balance. While they expect grain prices to remain volatile, Pilgrim’s earnings and margins are much more levered to poultry pricing.

Merrill continues to expect a sharp recovery in F2009, as they estimate EPS of $2.07 versus a loss of $3.25 in F2008. Believes that earnings will recover as industry production cuts take hold and pricing responds.

Notablecalls: Note the call was out last night just before close. Yet, I think it will get some play
today. I view PPC's 15% slide yesterday as gross overreaction and expect the stock to retrace at least part of it today.

Suspect corn (feed) prices will take a hit and as the poultry co's have shortened their supply contracts with the restaurants, they can more easily pass on price hikes from here.

Note that PPC was down more than SAFM itself yesterday depsite already warning of coming short this qtr.