Morningstar | Despite Softer U.S. Outlook, No-Moat Pilgrim's Pride Attractively Valued
We’re lowering our fair value estimate for Pilgrim’s Pride to $29 per share from $29.50 to incorporate a tempered sales growth forecast (2.7% annually long term versus 3.4% prior due to lower U.S. price inflation) and lower U.S. gross margin expectations through fiscal 2027 (11.0% versus 12.5% prior) in light of the competitive headwinds that we expect will plague the firm’s business prospects to a greater extent. Despite this, we view the shares as attractive, trading at a more than 40% discount to our valuation.We still believe the firm lacks a competitive edge. Even though Pilgrim’s 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, 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. But since that time, the industry has moved to new pricing strategies, which are helping to protect the processors from revenue/cost mismatches.
We view the Moy Park acquisition as positioned to bolster Pilgrim's profitability in Europe. Poultry producers’ operating margins in Europe tend to be lower than in 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. and Mexico 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 Pilgrim's can improve segment margins from 3.9% in 2017 to 5.5% by 2020.
Pilgrims Pride is primarily engaged in the production, processing, marketing and distribution of fresh, frozen chicken products to retailers, distributors and foodservice operators. The company's primary product types are fresh chicken products, prepared chicken products and export chicken products. The company's fresh chicken products consist of refrigerated (nonfrozen) whole or cut-up chicken, either pre-marinated or non-marinated and prepackaged case-ready chicken. The company's case-ready chicken includes various combinations of freshly refrigerated, whole chickens and chicken parts in trays, bags or other consumer packs labeled and priced ready for the retail grocer's fresh meat counter.
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