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

Pilgrim's Pride (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 (TSN) and Sanderson Farms (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.

Comments

[europeaninvest]

Great article.

[A Grower]

I for one raised chicks for Gold Kist and voted NO!!, to the sell. So I guess it serves them right.

[europeaninvest]

Bit off more than they could chew.

[User 199423]

Gee whiz, I wondered why this stock was down 70% in 9 months! I couldn't figure out why it was down 50% since they priced a deal 2 months ago. Ya really think it's wholesale meat prices? This whole industry is dialing back production in light of higher input costs. PPC and TSN have both announced multiple production cuts, and even SAFM has postponed a major expansion. Cattle and hog producers, which have much longer production cycles, are also culling herds which is temporarily depressing prices for competing meats. By year-end pricing for all proteins will be rising sharply, and so will these stocks. PPC has the most leverage to that dynamic.
Also, while PPC has the most debt, they don't have much in the way of current maturities and the deal gave them plenty of cash...so liquidity is off the table.
You can short this stock if you want too, but we are 8 years into a commodity cycle which historically has run 12-15 years. When commodities go, they all go. The only two I know which haven't had big moves to the upside are electricity and meat....meat is probably next. Long SAFM, PPC, and wish I had some CALM.