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Pilgrims Pride Corp PPC

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Labor Shortages Crimp Pilgrim's Pride's Third-Quarter Margins; Shares Modestly Undervalued

Analyst Note

| Rebecca Scheuneman, CFA |

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.

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Company Profile

Business Description

Pilgrim’s Pride is the second-largest poultry producer in the U.S. (62% of 2020 sales), Europe (27%), and Mexico (11%). The 2019 purchase of Tulip, the U.K.'s largest hog producer, marks the firm's entrance into the pork market, which represented 11% of 2020 sales. Pilgrim's sells its protein to chain restaurants, food processors, and retail chains under brand names Pilgrim’s, Country Pride, Gold’n Plump, and Just Bare. Channel exposure is split evenly between retail and food service, with the majority of food-service revenue coming from quick-service restaurants. JBS owns 80% of Pilgrim’s outstanding shares.

Contact
1770 Promontory Circle
Greeley, CO, 80634-9038
T +1 970 506-8000
Sector Consumer Defensive
Industry Packaged Foods
Most Recent Earnings Sep 30, 2021
Fiscal Year End Dec 26, 2021
Stock Type Slow Growth
Employees 58,900

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