Company Reports

Even as the second-largest poultry producer in the US (58% of 2023 sales), the UK and Europe (30%), and Mexico (12%), we think Pilgrim’s Pride has failed to create a competitive advantage. Pilgrim’s Pride primarily sells fresh chicken and pork (only in Europe), with just 27% of Pilgrim’s Pride's sales coming from prepared products, though this includes private-label offerings. Because meat is a commodity and carries little to no brand or pricing power, it is exposed to volatility in both input costs and selling prices. We don’t think the diversification afforded through acquisitions into pork and Europe necessarily reduces that risk, given the limited synergies we see across proteins and regions.

No-moat Pilgrim’s Pride delivered strong first-quarter results amid favorable chicken market conditions. Net sales were nearly $4.4 billion, almost 5% higher than a year ago. Profitability was even better, with adjusted EBITDA of $372 million, nearly 1.5 times that of the year-ago quarter. This resulted in a 490-basis-point adjusted EBITDA margin expansion to 8.5%, buoyed by lower feed costs.

Even as the second-largest poultry producer in the US (58% of 2023 sales), the UK and Europe (30%), and Mexico (12%), we think Pilgrim’s Pride has failed to create a competitive advantage. Pilgrim’s Pride primarily sells fresh chicken and pork (only in Europe), with just 27% of Pilgrim’s Pride's sales coming from prepared products, though this includes private-label offerings. Because meat is a commodity and carries little to no brand or pricing power, it is exposed to volatility in both input costs and selling prices. We don’t think the diversification afforded through acquisitions into pork and Europe necessarily reduces that risk, given the limited revenue or cost synergies we see across proteins and regions.

No-moat Pilgrim’s Pride reported impressive fourth-quarter results that reflected a dramatic turnaround from the year-ago quarter amid recovering chicken prices and easing input cost inflation. Net sales of $4.5 billion were nearly 10% higher and beat our forecast of $4.4 billion. The improvement in profitability was even better, with adjusted EBITDA of $310 million, nearly five times higher than the fourth quarter of 2022 and well ahead of our forecast of $251 million. Due to near-term profits, we anticipate raising our $28.50 fair value estimate by a low to mid-single-digit percentage.

We’re reinitiating coverage of meat producer Pilgrim’s Pride with a fair value estimate of $28.50 per share and a no-moat rating. Our fair value estimate implies 13 times price/adjusted earnings and 7 times enterprise value/adjusted EBITDA off our fiscal 2024 estimates. At the current market price, we think shares are fairly valued. Investors looking to get into meat processing should take up Tyson shares, which offer significant risk-adjusted upside.

Even as the second-largest poultry producer in the U.S. (62% of 2022 sales), the U.K. and Europe (28%), and Mexico (11%), we think Pilgrim’s Pride has failed to create a competitive advantage. Pilgrim’s Pride primarily sells fresh chicken and pork (only in Europe), with just 25% of Pilgrim’s Pride's sales coming from prepared products, though this includes private-label offerings. Because meat is a commodity and carries little to no brand or pricing power, it is exposed to volatility in both input costs and selling prices. We don’t think the diversification afforded through acquisitions into pork and Europe necessarily reduces that risk, given the limited revenue or cost synergies we see across proteins and regions.

We are dropping coverage of Pilgrim’s Pride. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Although Pilgrim’s Pride is the second-largest poultry producer in the countries in which it operates, we don’t believe it has carved out an edge. About 80% of Pilgrim’s products are undifferentiated and therefore have difficulty commanding price premiums and higher returns. Further, its profit margins can be quite volatile, as several factors outside the firm’s control affect costs (weather, flock disease, global trade), although this is moderated by Pilgrim's geographic diversity. Prices of feed ingredients can be quite volatile, surging in 2008 and leading to Pilgrim’s bankruptcy. Since then, the industry has moved to new pricing strategies, which are helping protect the processors from revenue/cost mismatches. However, despite Pilgrim’s size, we don’t believe this affords it a scale cost advantage, underpinning our no-moat rating.

We don’t expect to materially alter our $36.50 fair value estimate for no-moat Pilgrim’s Pride after reviewing third-quarter results, leaving the shares trading at a 35% discount to our valuation. While commodity markets tend to be volatile on their own, we think investors underappreciate how Pilgrim’s geographic diversity helps curb the erratic nature of its consolidated margins. In the quarter, strength in Pilgrim’s U.S. business offset weakness in international markets, and while the U.S. market is beginning to cool, this should be balanced by a recovery abroad.

No-moat Pilgrim’s Pride reported a solid second quarter, with 24% organic constant-currency sales growth driven by a 25% jump in prices and a 1% drop in volumes, which remained rather resilient as consumers switched to chicken from more expensive proteins in the face of steep inflation. Further, a weak economic environment in Europe (27% of period sales) is driving consumers from food service to retail, where Pilgrim’s European business is weighted. We think global chicken prices will remain elevated over the next year, given high feed prices, which underpin contract chicken prices, and tight chicken supply in the U.S. given the lower hatch rates of the new commercial breed. We don’t think bird flu will further threaten supply in the U.S. and Europe (90% of sales) where biosecurity measures are successfully controlling the virus. However, in Mexico (10%), live birds are sold, making it more difficult to control the spread of disease, posing a potential risk to supply.

Although Pilgrim’s Pride is the second-largest poultry producer in the countries in which it operates, we don’t believe it has carved out an edge. About 80% of Pilgrim’s products are undifferentiated and therefore have difficulty commanding price premiums and higher returns. Further, its profit margins can be quite volatile, as several factors outside the firm’s control affect costs (weather, flock disease, global trade). Prices of feed ingredients can be quite volatile, surging in 2008 and leading to Pilgrim’s bankruptcy. Since then, the industry has moved to new pricing strategies, which are helping protect the processors from revenue/cost mismatches. However, despite Pilgrim’s size, we don’t believe this affords it a scale cost advantage, underpinning our no-moat rating.

The year is off to a great start for no-moat Pilgrim’s Pride, with food service volumes (around 50% of sales) returning to prepandemic levels while retail demand remains solid despite rising inflation, as chicken is considered a cheaper alternative to other proteins. The firm recorded impressive sales growth of 30%, outpacing our 11% expectation for the full year. Labor shortages and low hatchability rates have resulted in product shortages, driving chicken prices higher, and we think Pilgrim’s may continue to benefit from pronounced disequilibrium in the market in the short run. Moreover, avian flu has begun to spread among global flocks, potentially limiting future supply, although the impact has been rather immaterial to date. Even so, we don’t plan to alter our $36 fair value estimate materially due to significant uncertainty around cost inflation and additional COVID-19 outbreaks, which could disrupt coming quarters.

Although Pilgrim’s Pride is the second-largest poultry producer in the countries in which it operates, we don’t believe it has carved out an edge. About 80% of Pilgrim’s products are undifferentiated and therefore have difficulty commanding price premiums and higher returns. Further, its profit margins can be quite volatile, as several factors outside the firm’s control affect costs (weather, flock disease, global trade). Prices of feed ingredients can be quite volatile, surging in 2008 and leading to Pilgrim’s bankruptcy. Since then, the industry has moved to new pricing strategies, which are helping protect the processors from revenue/cost mismatches. However, despite Pilgrim’s size, we don’t believe this affords it a scale cost advantage, underpinning our no-moat rating.

After the market’s close, JBS announced it has withdrawn its proposal to acquire the 20% of Pilgrim’s Pride shares that it does not currently own, as it was unable to agree on terms with the special committee formed by Pilgrim’s board of directors. As we outlined in our Feb. 6 note, the committee indicated JBS’ initial and subsequent bids of $26.50 and $28.50 per share, respectively, were inadequate. We agree with this assessment, as we think our $34 per share fair value estimate appropriately reflects Pilgrim’s intrinsic value, which is underpinned by our long-term expectations for 2%-3% annual sales growth and 7%-8% operating margins. Demand for chicken (85% of sales) should remain strong, which is benefitting from consumers’ shift away from processed meat and red meat (beef and pork), which have been linked to various cancers, per the World Health Organization. With the stock trading down a midteen percentage in after-hours trading, the shares now sell at a 30% discount to our valuation, which we view as a compelling opportunity to build positions.

No-moat Pilgrim’s Pride’s fiscal 2021 results were largely as we expected, confirming that the pandemic recovery in the U.S. and Mexico (73% of sales) is on track, while Europe (27%) continues to experience headwinds. We don’t expect to materially alter our $34 fair value estimate, as we reverse our prior assumption that the U.S. tax rate will increase in 2022, offset by lower profit margins for Europe in 2022. Shares trade at a 15% discount to our valuation, and we suggest investors hold positions, although the stock could be volatile if JBS and Pilgrim’s fail to agree on terms regarding the proposed acquisition.

After the market’s close, no-moat Pilgrim’s Pride provided an update on the Aug. 13 proposal from JBS (which owns 80% of Pilgrim’s) to purchase the remaining 20% stake for $26.50 per share. Pilgrim’s board of directors formed a special committee to review the proposal, and the release disclosed that on Oct. 29, the committee informed JBS that it would not support the proposal unless JBS significantly increased the purchase price. On Nov. 15, JBS responded by increasing the offer to $28.50 per share, to which the committee replied that it viewed the revised offer as still insufficient. On February 4, JBS informed the committee that it will provide a response by the end of February.

Although Pilgrim’s Pride is the second-largest poultry producer in the countries in which it operates, we don’t believe it has carved out an edge. About 70% of Pilgrim’s products are undifferentiated and therefore have difficulty commanding price premiums and higher returns. Further, its profit margins can be quite volatile, as several factors outside the firm’s control affect costs (weather, flock disease, global trade). Prices of feed ingredients can be quite volatile, surging in 2008 and leading to Pilgrim’s bankruptcy. Since then, the industry has moved to new pricing strategies, which are helping protect the processors from revenue/cost mismatches. However, despite Pilgrim’s size, we don’t believe this affords it a scale cost advantage, underpinning our no-moat rating.

Given the labor-intensive nature of meat processing combined with widespread worker shortages, we expected no-moat Pilgrim’s Pride to experience cost pressure in its third quarter, and we were correct. Adjusted gross and operating margins each contracted 50 basis points year over year to 9.7% and 6.6%, respectively. Labor shortages forced the company to sell a larger proportion of low-margin, less value-added product, the primary driver of the margin degradation. Despite Pilgrim’s automation efforts (which should eliminate 15% of its global workforce in the next few years), we expect labor shortages to persist into 2022, due to the drop in the U.S. and U.K. workforces, driven by the pandemic in the United States and Brexit in the United Kingdom, which has caused workers to leave for continental Europe. Even so, we think operating margins will improve from 2020’s pandemic-driven nadir of 3.7%, to 5.8% in 2021 and 6.9% in 2022, as chicken prices remain elevated, with the average cutout hovering between $1.10 and $1.20 per pound, compared with the five-year average of $0.60-$.70, offsetting Pilgrim’s higher costs. We expect chicken prices will remain high, as cold storage inventories are well below average and production is restrained by deteriorating hatchability, as an industrywide switch to a new breed (in an effort to improve breast quality) has caused hatch rates to fall to 77% currently, much lower than expected, compared with the 81% long-term average.

Brazil-based JBS, 80% owner of no-moat Pilgrim’s Pride (which it purchased out of bankruptcy in 2009 for $800 million), has offered to acquire the remaining 20% stake for $26.50 per share. JBS seeks to simplify its corporate structure by delisting Pilgrim’s as a public company, allowing for a reduction in administrative expenses and an increase in operational flexibility. The proposal equates to an $8.4 billion enterprise value, 6.3 times our 2022 EBITDA estimate and 6.5 times that of FactSet consensus. However, we view this as a light offer, particularly when compared against the 9.1 times Sanderson Farms agreed to be purchased for earlier this week by Cargill and Continental Grain Company. We maintain our $32 per share fair value estimate for Pilgrim’s, which implies an enterprise value to EBITDA of 7.5 times and is underpinned by our long-term expectations for 2%-3% annual sales growth and 7%-8% operating margins. Shares of Pilgrim’s popped more than 20% on the news to above $27, suggesting investors also think there could be upside to the offering.

Even though Pilgrim’s Pride is the second-largest poultry producer in the countries in which it operates, we don’t believe it has carved out an edge. After acquiring the Kerry Group's consumer foods business in late 2021, 70% of Pilgrim’s products will be undifferentiated and therefore have difficulty commanding a price premium and higher returns. Several factors outside the firm’s control affect costs (weather, flock disease, global trade). The prices of the primary feed ingredients can be quite volatile, surging in 2008 and leading to Pilgrim’s bankruptcy. Since then, the industry has moved to new pricing strategies, which are helping protect the processors from revenue/cost mismatches. However, despite Pilgrim’s size, we don’t believe this affords it a scale cost advantage, underpinning our no-moat rating.