United States-Sanderson Farms credit rating lowered.

UNITED STATES-SANDERSON FARMS DOWGRADED.

-Sanderson Farms Inc.’s shares fell as much as 9.3% on Tuesday after JPMorgan cut its rating on the chicken producer to neutral from overweight, citing valuation.

In a note, JPMorgan analyst Ken Goldman wrote that Sanderson Farms’ shares recently eclipsed his $38 price target. He said JPMorgan looks "positively upon Sanderson’s fundamentals" and believes profitability is "on the immediate horizon." However, following the company’s recent stock upswing, "potential risks and rewards are balanced."

Sanderson shares recently hit a low for the day of $37.16. Shares are up more than 22% over the last three months.

Goldman wrote that Sanderson Farms’ improved conditions are already reflected in the company’s shares; chicken production is down and corn prices have steadied near $4 a bushel.

Mike Cockrell, Sanderson Farms’ chief financial officer, told Dow Jones Newswires on Tuesday that the company expects to benefit from lower grain prices in fiscal 2009 to the tune of $162 million, as compared to fiscal 2008.

As for risks, the chicken industry is seeing "still-weak demand." Also, Goldman wrote, the possibility exists that production could ramp back up. JPMorgan’s less-aggressive stance on Sanderson Farms also is based on "renewed threats by Russia of eventually cutting off all imports."

Russia , Goldman wrote, has in recent weeks cut off a few U.S. plants on "questionable grounds." For example, Russia said chicken from the plants in question contained antibiotics that the companies say aren’t used there. The country also said recently that within a few years, it expects to have sufficient domestic production to take care of all its chicken needs. Goldman wrote that "scant evidence" exists the country can escalate production that quickly.

Goldman wrote that Sanderson trades at 2.4 times its tangible book value, as compared to Tyson Foods Inc. (TSN), which trades at 2 times tangible book value, and Smithfield Foods Inc. (SFD), which trades at 1.1 times book value. Goldman said Wall Street earnings estimates "are starting to seem aggressive."

JPMorgan’s Goldman expects Sanderson Farms to post fiscal 2009 earnings of $1.60 a share and fiscal 2010 earnings of $2.37 a share. Wall Street analysts expect a 2009 profit of $2.44 a share and 2010 earnings of $3.66 a share, according to Thomson Reuters.

"We find it increasingly difficult to model above $3.00 in EPS until corn drops, production dips and/or demand rises," Goldman wrote.

Finally, Goldman wrote, further downgrades for Sanderson Farms are possible. Goldman said five of the nine analysts that follow the company have buy or overweight ratings; the other four stand at neutral or hold.

"Any time a stock has more buys than holds and no sell/underweights and is coming off a strong performance, the chances of a downgrade probably are higher than the chances of an upgrade," Goldman wrote.