Put Pilgrim's Pride on the Menu

Zain Akbari: We believe media and regulatory scrutiny of industry pricing has created an opportunity to take a position in Pilgrim's Pride, which is poised to benefit from increased protein consumption and healthier eating, despite the sector's lack of economic moats.

While meat processors are sensitive to grain market dynamics, demand tailwinds should prove durable, and we expect chicken to outperform other proteins long term due to its health profile and lower cost. This is despite recent scrutiny of industry pricing practices focused on the construction of indices that are often used to value chicken destined for grocery stores. We see these concerns as overblown, and expect Pilgrim's Pride, Tyson, and Sanderson Farms have limited exposure.

Of greater concern, falling beef prices should exert short-term top-line pressure on chicken producers once lower cattle prices translate to cheaper ground beef in grocery stores, leading to substitution. While lower red meat prices cut against five years of rapid price hikes, we believe much of the shift to chicken is durable and secular, and should still be driven by consumer health consciousness.

Of our coverage list, we believe investors should take a close look at Pilgrim's Pride, which we see as especially attractive. In addition to the industry tailwinds, we see significant opportunity in Pilgrim's Mexican operations. As a third of the Mexican chicken market consists of sales of live birds due to the perceived freshness and food safety shortcomings of locally produced preprocessed poultry, we expect Pilgrim's should capitalize on its reputation for food safety and distribution capabilities to change perceptions and capitalize on its standing as a purveyor of a safer, more convenient product.