Pilgrim's Pride: Chicken Is Good For You

Aug.28.07 | About: Pilgrim's Pride (PPC)

With its recent acquisition of GoldKist, Pilgrim's Pride Corporation (NYSE:PPC) is now the largest chicken company in the United States. This acquisition was part of a larger consolidation of the chicken industry, a development that has given large companies like PPC and its rival Tyson Foods, Inc. (NYSE:TSN) a great deal of pricing power, especially with the industry-wide production cuts that have limited supply and helped sustain higher prices.

This pricing power has been especially important with the rising price of corn, which has increased feed costs to a substantial degree. Fortunately for PPC, it's been able to offset these costs with higher prices, and its most recent quarterly report announced net income of $62 million, compared with a $20 million loss in the same quarter of 2006. For the nine months of fiscal year 2007, PPC's revenues are up nearly 65%.

It's no surprise, then, that PPC's stock price has benefited, and it is now trading near its 52-week high. It's not clear whether its margins will be sustainable, given the potential for corn prices to keep rising and the cyclical nature of poultry prices. But a recent report from Bank of Montreal's food analyst argued that corn prices have been self-correcting (they were down 25% over the summer), and it also pointed to the rise of Blue Ear disease in China, which could mean a rise in demand for protein-rich food like chicken; meanwhile the consolidation and production cuts should stabilize price volatility for the foreseeable future. At the right price, this one could well be a nice meal for your portfolio.

Type of Stock: The largest chicken company in America, with a newfound return to profitability.

Price Target: The Bank of Montreal report predicted a 12-month price target of $47. With the stock near $40, that would be a nice gain of more than 10%. But this stock tends to go up and down a bit, and you might be able to make your purchase closer to $35.

PPC 1-yr chart: