Morningstar | Pilgrim’s Pride Faces Near-Term Profit Headwinds, but Long-Term Thesis Is Intact; Shares Attractive
We do not expect to make a material change to our $29.50 per share valuation for no-moat Pilgrim’s Pride after tepid third-quarter earnings. While Pilgrim’s profitability struggled in the U.S. and Mexico (just under 70% and 15% of sales, respectively), we believe the ensuing changes to our short-term forecast will be offset by a time value of money-related adjustment. Our long-term outlook is still intact, calling for 3% sales growth and 11% adjusted EBITDA margins, on average, over the next 10 years. We see the shares as attractive, as we believe Pilgrim’s diversified portfolio will deliver long-term performance despite near-term headwinds.Year to date, Pilgrim’s sales grew 3.2% as its adjusted EBITDA margin slid by around 600 basis points (from the same period in the prior year) to 8.3%, trailing our 9% full-year forecast. Results were again hindered by fewer-than-normal supermarket chicken breast features as well as demand pressure from low prices for competing proteins and an unusually strong growing season in Mexico that led to unexpected supply. More encouragingly, management instituted a $200 million share repurchase program, which we see as prudent as we believe prevailing market sentiment underappreciates Pilgrim's long-term strength.
While near-term results have been crimped by relatively cheap competing proteins, volatile trade dynamics, and low pricing for commodity deboned large birds, we believe the long-term demand story remains strong for chicken as the increasing importance of protein in the nutritional zeitgeist, combined with the meat’s health profile and low cost, should lead to market share gains for poultry at the expense of beef and pork. Pilgrim’s diversification efforts (across bird sizes, contract structures, and geographies) and responsive product focus (exemplified by its recent decisions to convert some of its big bird commodity plants to more profitable items over the past year) should help mitigate the near-term headwinds.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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