Pilgrim's Pride -- "The Sky is Falling!" (PPC)

Pilgrim's Pride Corp. (PPC), with a 15.4% footprint in the geographical U.S.A, is one of the nation's largest poultry producers, second only to Tyson Foods, Inc. (TSN), the market leader with a 23.2% national reach (as of December 2004).

Pilgrim’s Pride said recently that it was withdrawing its previously issued guidance for the second quarter and fiscal 2006, citing depressed prices for some chicken exports brought on by consumer fears of bird flu. Chicken leg-quarter prices on a full-load delivered basis into the U.S. northeast currently are quoted at 18 to 19 cents per pound, down more than 60% from the end of the third quarter 2005. Leg-quarter prices at this time a year ago were around 31 to 32 cents into the Northeast.

The company did note, too, that during the current quarter its U.S. operations have sustained a loss of roughly $15 million, or 23 cents per share.

A backward peak at the Company’s 10-Q filing for the three-months ended December 31, 2005, does give us a foreboding of the challenging operational environment facing corporate in the coming months:

Net income for the first fiscal quarter of 2006 was down $22.8 million, or 47.1%, from the first fiscal quarter of 2005. This decrease was primarily driven by:

• Increased cost of sales due to increased energy costs, higher freight delivery costs and higher soybean meal costs. Comparing the 1Q:06 to the same period last year, feed ingredient costs rose in the U.S. 3.6% and in Mexico 9.0%, due primarily to freight and soybean meal prices. [ed note. Feed ingredient purchases are the single largest component of cost of sales, representing approximately 26% of consolidated cost.].
• Selling prices in Mexico dropped sharply due to an oversupply situation that occurred during the quarter. [The Company’s second largest market.] Selling prices were off 13.1% from the prior year period.
  Market disruptions caused by avian influenza scares in other parts of the world compounded by shipping disruptions created during the recent hurricane season have affected the selling prices for chicken parts in the U.S. and overseas.

Gross profit in the 1Q:06 and in the 1Q:05 were 8.8% and 11.8%, respectively. This loss of 300 basis points was because cost of sales increased $34.6 million, due primarily to increased energy costs and transportation costs created by fuel cost increases along with an increase in the cost of soybean meal. Might investors have seen that one coming?

Misery loves company. Filed under RELATED TRANSACTIONS:

Lonnie “Bo