Poultry stocks increase with optimistic outlook

The industry has been facing pressure as fears of avian flu have cut demand, leading to oversupply.


But Stifel Nicolaus analyst Oliver Wood is recommending that investors build a position now while share prices are low.


"Our optimism is based on our expectation that production cutbacks during the summer of 2006 as well as solid international demand for US chicken will support upward momentum in wholesale chicken prices, which underlie company earnings," he wrote in a research note to clients.


However, he warned that fears that avian flu might spread in the US could still lead to a decline in chicken demand, both domestically and internationally.


Pilgrim's Pride, the second largest US poultry producer, was given a "buy" rating, because the company's shift away from turkey products toward chicken will result in more stable earnings. Sanderson Farms also received a "buy" rating, because of above-average margins and a strong balance sheet. Gold Kist, the third largest US poultry processor, received a "hold" rating. Tyson Foods, the largest US poultry producer, which also processes beef and pork, also received a "hold" rating, because of concern that an oversupply of beef will negatively impact earnings.


All of these companies' shares edged up on the stock market following the release of the new ratings.