Morningstar | Shares of No-Moat Pilgrim’s Pride Present a Compelling Opportunity
We see value in no-moat Pilgrim’s shares, as we believe the market fails to appreciate the impact of improved demand for chicken in the U.S. and the transformation of recently acquired assets in Europe, as shares trade around $20, lagging our $29 fair value estimate.Last year was a challenging year for Pilgrim’s as the U.S. (70% of company profits) experienced a sharp drop in chicken demand, which resulted in Pilgrim’s U.S. operating margins falling from 11.8% in 2017 to 4.2% in 2018. Consumers shifted their protein consumption from chicken to pork because of the sharp drop in pork prices due to the excess supply resulting from the trade disputes with Mexico and China, regions that traditionally purchase significant amounts of U.S. pork. However, we are starting to see signs of improved demand for chicken, which we think bodes well for a cyclical recovery. For one, grocers and foodservice operators have been capitalizing on the low price of chicken with increased features and promotions (particularly for wings and tenders) to drive traffic into their establishments. Both cuts had been trading at five-year lows for much of 2018, but prices on tenders began to lift in October while prices of wings rebounded in January, which bodes well for margins on these products going forward. As such, we’re calling for U.S. operating margins to improve to 5.8% in 2019 and 8.0% in 2020.
In addition, despite a difficult 2018, our long-term thesis for improved profitability in Pilgrim’s European business appears to be on track as Pilgrim’s market share gains with key customers remain ahead of plan, synergies are on track, and the firm is implementing several operational improvement projects, such as better whole-bird utilization and maximizing plant efficiencies. We continue to expect that margins in this region can improve from the current 4.3% to a sustainable 5.5% in the next few years, narrowing the gap with the 8% generated on its home turf.
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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