EUR 850.00 For Business Accounts Only

Morningstar | African Swine Fever Driving a Turn in the U.S. Protein Cycle for No-Moat Pilgrim’s

Even though Pilgrim’s Pride is the second-largest poultry producer in the United States (68% of revenue) and Mexico (12%), with the remainder of sales from Europe following the 2017 deal for Moy Park, we don’t believe it has carved out an edge.Proteins are generally on trend with consumers, but over 80% of Pilgrim’s products are 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, corn and soybean meal, can be quite volatile. They surged in 2008 and led to Pilgrim’s bankruptcy. Since that time, the industry has moved to new pricing strategies, which are helping to protect the processors from revenue/cost mismatches. However, despite Pilgrim’s size, we do not believe this affords it a scale cost advantage. The absence of a competitive advantage (and resulting outsize returns) leads us to our no-moat rating.Pilgrim’s aims to unlock significant value in its Moy Park acquisition, which we view as achievable. Poultry producers’ operating margins in Europe tend to be lower than other regions (midsingle digits versus high single digits in the U.S. and Mexico) because the balance of power swings in the favor of customers. Even so, Pilgrim’s thinks it can improve its European margins to the same level as its U.S. operations in the next four years as it differentiates itself through reliable supply and consistent quality. While we think 8%-9% margins will prove difficult, we believe Europe margins can improve from 4.3% in 2018 to 5.5% by 2020.Pilgrim’s has implemented many changes since emerging from bankruptcy in 2009 to improve the level and stability of profits. It has cut costs, refocused resources on high-potential customers, improved customer contracts, and expanded its less commoditized prepared food lineup to 16% of revenue. However, most of the firm’s revenue and profits are tied to commoditylike products that lack pricing power, and we’re not confident in Pilgrim’s ability to generate returns on invested capital in excess of its 8.1% cost of capital over time.