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Pilgrim's Pride (NASDAQ:PPC) committed a cardinal sin a little over a year ago. This chicken producer with a then market cap of $2.6 billion bought its third largest rival, Gold Kist, for $1.1 billion. It increased its debt from a half a billion to over $1.3 billion in order to acquire Gold Kist.

The merger didn't work out. PPC got caught in feed and energy cost increases which it was unable to pass on to customers. The company now has a whole lot of chicken that it cannot sell at a profit (minus $190 million the last 6 months) with a whole lot of debt (now $1.5 billion). Last quarter the company surprised by losing less than analyst consensus and the market reacted by bidding up the stock from $12 to $17 in 2 weeks.

PPC here is greatly overpriced. Its costs are daunting. As its CEO stated: "Market prices for breast meat need to be in the range of $2.15 for the industry to break even." Current price of breast meat is $1.33, a far cry from where PPC needs to sell its product just to stay afloat. Feed has decreased a bit, but nowhere near enough to make $1.33 sufficient.

Think about it. Every time a consumer buys its product, the company loses $0.82! PPC is shutting down production and plants which eventually should help cut some of its overhead but that will take time. It has already done a secondary offering of 7.5 million shares last May, diluting its shares outstanding from 66 to 74 million. That's a rather large 11% dilution. Debt's still extreme. Unlike its competitors (Tyson (NYSE:TSN) and Sanderson Farms (NASDAQ:SAFM)), the company's debt to equity is ratio is ugly at 1.36. It is  the weakest link in the food chain and like its chickens, it too should be sold.

Disclosure: Short.

Source: Pilgrim's Pride: The Weakest Link in the Food Chain