President Vladimir Putin is not happy with the recent sanctions by the U.S. and their European counterparts. Earlier this week, he ordered his government to prepare retaliatory measures to counter the sanctions.
Today, it came out that Russia is banning imports of a variety of foods from the countries that signed the initial sanctions against Russia, and has kept further sanctions on the table. According to the Chairman of the Government of the Russian Federation (Prime Minister), Dmitry Medvedev “fulfilling the presidential order, I’ve signed a government decree. Russia imposes a total ban on deliveries of beef, pork, fruit, vegetables, poultry, fish, cheese, milk, nuts, sausages, and dairy products. These sanctions apply to the U.S., European Union, Australia, Canada, and Norway.” Prime Minister Medvedev also stated that the sanctions are in effect for one year, but could be reviewed before the one year ban is completed.
The impact should be quick and negative, due to the fact that Russian imported about $1.3 billion in food and agricultural items last year from the U.S. According to U.S. census data, food and agricultural products accounted for about 11% of total exports to Russia in 2013.
The Russian government is also considering a ban on European airlines flying to Asia over Siberia. But it appears as though the Russian government is just using this as leverage during this session of saber rattling for future concessions.
The Russian government has stated that they will now order more meat from Brazil, and cheese from New Zealand.
These sanctions will negatively impact Western food companies, especially in Europe. Companies that have a large exposure to Russia will be impacted the most, but we have found two companies that have limited exposure to the Russian markets, which will decrease the negative impact by the sanctions.
Companies to consider during the sanctions
Pilgrim’s Pride (PPC), a Zacks Rank #1 (Strong Buy) has seen exports to Russia decline considerably since 2007. In ’07, Russia accounted for 42% of total exports, and by the years end of 2013, Russian exports only accounted for 14% of total exports. Therefore, Pilgrims has already seen a significant decline in exports to this country, and has in-place defensive measures to counter the loss of business. On the positive, over this same period of time, exports has risen, and the major importer has been Mexico, jumping up from 9% of total exports in 2007, to 31% of total exports in 2013.
Interestingly, JBS USA owns three fourths, a controlling interest, in Pilgrim’s Pride. And JBS SA, a publicly traded company listed on the San Paulo Brazil Stock Exchange, owns JBS USA. Given that Russia stated that they are increasing imports from Brazil, this might be a way around the sanctions for Pilgrims, in theory.
Over the past 7 days, the Zacks Consensus EPS estimates for Q3, Q4, FY 2014, and FY 2015 have all risen. For Q3 estimates have risen from $0.62 to $0.66, Q4 have increased from $0.44 to $0.59, FY 2014 jumped from $2.14 to $2.37, and FY 2015 rose from $1.66 to $2.47. Further, over the past 4 quarters, PPC has had an average positive earnings surprise of 7.65%.
Given that the sanctions were just announced today, we should expect the Zacks Consensus EPS estimates to decrease to some extent, but the decrease should be minimal.
Sanderson Farms (SAFM), a Zacks Rank #1 (Strong Buy), was quick to begin defensive measures in anticipation of the sanctions. According to Mike Cockrell, CFO of Sanderson Farms, “We’d be crazy not to be making calls to alternative markets right now.”
In 2011 total exports accounted for 13% of sales, with Russia and China as the leading importers for Sanderson Farms, but even then, according to management “Russia has become a less important export market as other countries, including Mexico, and several nations in Africa, have been buying more U.S. poultry products.” Further, like Pilgrim’s Pride, the company has seen a decline in exports to Russia, and have shifted those losses to more growing areas like Mexico, and African countries over the past several years. Therefore, the company has less exposure to the sanctions than it had a few years back, lessening the negative blow to the bottom line.
Over the past 7 days, the Zacks Consensus EPS estimates for Q3, Q4, FY 2014, and FY 2015 have all risen. For Q3 estimates have increased from $3.58 to $3.86, Q4 rose from $3.07 to $3.61, FY 2014 jumped from $10.10 to $10.92, and FY 2015 increased from $8.52 to $8.77. Further, over the past 4 quarters, SAFM has had an average positive earnings surprise of 15.01%.
Like Pilgrim’s Pride, we should see the Zacks Consensus EPS estimates for Sanderson Farms decline over the next few days, but not to the extent the more exposed companies will encounter.
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