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Coverage Initiation: Pilgrim’s Pride Corp.
Value Line has initiated coverage of Pilgrim’s Pride Corp. (PPC) in its flagship product, The Value Line Investment Survey. Founded in 1946 as a retail feed store by brothers Bo and Aubrey Pilgrim, Pilgrim’s Pride is now involved in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products. Since its start, the company has grown rapidly, acquiring many businesses along the way, and held its initial public offering on November 15, 1986 on the New York Stock Exchange. In 2003, it purchased ConAgra’s (CAG) chicken division, which effectively doubled the company’s size. Later in 2006, the acquisition of Atlanta-based Gold Kist propelled Pilgrim’s to the world’s second-largest poultry producing company behind Tyson Foods (TSN), and the fourth-largest U.S. meat protein company by revenues.
By 2008, the chicken market had changed dramatically, owing to record-high corn prices and an oversupply of chicken. This, coupled with financial constraints, forced Pilgrim’s Pride to file Chapter 11 bankruptcy protection by the end of the year. While in bankruptcy, Pilgrim’s brought in a new CEO, Don Jackson, who steered it through a 13-month reorganization in which the company closed plants, eliminated thousands of administrative and production jobs, and became refocused. During this time, Pilgrim’s stock continued to trade publicly via the over the counter market. The following December, the company emerged from bankruptcy protection and began trading on the New York Stock Exchange again in February, 2010 under the ticker symbol PPC. As of December 28, 2012, Pilgrim’s Pride voluntarily transferred its stock exchange listing to The NASDAQ Global Select Market.
After emerging from bankruptcy, JBS USA Holdings, Inc., a wholly-owned subsidiary of JBS S.A., a Brazil-based meat producer, purchased a 64.0% stake in the new company for about $800 million. As the result of subsequent purchases, JBS USA now owns about 75.5% of Pilgrim’s stock. As such, JBS is entitled to appoint a majority of the members of Pilgrim’s board of directors, and also has the ability to control its management, policies, and financing decisions.
Since January of 2010, the company has gone through significant change in order to reduce costs and operate more efficiently, as well as take full advantage of synergies following the JBS USA acquisition. Specifically, it reduced its production footprint to mitigate capacity utilization and efficiency issues. Further, Pilgrim’s continues to evaluate its noncore businesses, which have resulted in the sales of certain businesses, such as distribution centers to JBS Trading International, Inc. (a wholly owned subsidiary of JBS USA) and its commercial egg operation to Cal-Maine Foods, Inc. (CALM).
At present, the company is the second-largest chicken producer in the world and employs roughly 38,000 with operations in the United States, Mexico, and Puerto Rico. Sales efforts are largely targeted towards the foodservice industry, principally chain restaurants and food processors such as Yum! Brands (YUM), Burger King (BKW) and Chick-fil-A, distributors such as US Foods and Sysco (SYY), and retail customers including grocery store chains and wholesale clubs such as Kroger (KR), Wal-Mart (WMT - Free Wal-Mart Stock Report), Costco (COST), Publix (PUSH), and Sam’s Club. (Wal-Mart is Pride’s biggest customer, accounting for 9.7% of 2012’s sales.) Altogether, products are shipped to customers in approximately 100 countries.
The poultry industry is attractive for many reasons. According to the USDA, chicken production in the U.S. has increased at a compounded annual growth rate of 2.8% over the past 20 years. Similarly, per capita consumption of chicken has increased at a compounded annual growth rate of 2.1%. During this same period of time, per capita beef and pork consumption has declined at rates of 0.6% and 0.3%, respectively. This rise in chicken demand is attributable to its relative affordability compared to other proteins, the increasingly health conscious nature of U.S. consumers, chicken’s consistent quality and versatility, and its introduction on many foodservice menus. Moreover, the production lifecycle of chickens (about 10 weeks) is much shorter compared to other proteins (beef: 28 to 30 months and pork: 11 to 12 months).
Consequently, the chicken industry is highly competitive. In the U.S. and Mexico, Pilgrim’s Pride generally competes with other vertically integrated poultry companies on the terms of price, product quality, product development, brand identification, breadth of product line, and customer service. Additionally, there is some competition from non-vertically integrated processors in the U.S. prepared chicken business, however as a vertically integrated company, Pilgrim’s typically enjoys benefits related to long-term cost and quality.
Despite the favorable growth trends, profitability in the chicken industry is materially affected by the commodity prices of feed ingredients and chicken, which are determined by supply and demand factors. As a result, the chicken industry is subject to cyclical earnings fluctuations. The production of feed ingredients is positively or negatively affected primarily by the global level of supply inventories and demand for feed ingredients, the agricultural policies of the U.S. and foreign governments, and weather patterns throughout the world. More recently, feed prices have been impacted by increased demand both domestically (for ethanol) and globally (for protein production). Market prices for feed ingredients remained at historically high levels throughout 2012 and continue to remain volatile.
Moreover, operations will continue to be subject to federal, state and local governmental regulation, including in the health, safety, and environmental areas. Over the coming years, the company expects increased regulation by various agencies concerning food safety, the use of medication in feed formulations, and the disposal of chicken by-products and wastewater discharges.
The company’s objectives are to continue to be a valued partner to key customers, relentlessly pursue operational excellence, and strategically expand value-added exports. As production and sales climb, Pilgrim’s Pride will focus on improving operating efficiencies by targeting cost reductions, improving processes, training, and its total quality management program. Specific initiatives include benchmarking live and plant costs against the industry, striving to be in the top 25% of the industry for yields and costs, driving accountability and ownership deeper in the organization, conducting monthly performance reviews with senior management, and improving its sales mix and price. Also, the company hopes to continue its focus on international opportunities as well as further diversify its foreign markets to complement the U.S. chicken operations and capitalize on attractive opportunities.
Subscribers interested in this large chicken producer are advised to consult Value Line’s quarterly reports for Pilgrim’s Pride Corp., as well as any supplemental reports and relevant articles as important news items arise.
At the time of this article's writing, the author did not have a position in any of the companies mentioned.