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Morningstar | Trade concerns threaten Pilgrim's growth, but its balanced portfolio should help weather the storm.

Despite cost savings, better contract terms, and a growing prepared-foods lineup, Pilgrim’s fortunes are still largely dictated by external dynamics rather than a competitive edge. The firm competes in a low-margin industry (its operating margins including Moy Park have averaged 10% since 2015) with hard-to-differentiate core products that carry little pricing power. While rising demand for higher-protein foods and low feed costs are tailwinds, poultry production is competitive and affected by trade dynamics, so economics can shift quickly.We see Pilgrim’s diversified exposure to fresh chicken as a plus (fresh products constitute about 75% of U.S. sales). Its U.S. chicken sales are equally exposed to big birds, tray pack, and small birds, unlike Tyson’s steadier small-bird and tray-pack focus and Sanderson Farms’ higher-margin but more volatile larger-bird skew. We believe it can leverage recent investments to expand higher-margin prepared-food revenue (roughly 20% of U.S. sales), as learnings from Moy Park’s segment strength are extended. Its efforts to add organic and antibiotic-free items (which now account for about 30% of its domestic production) should also bear fruit. We expect the U.S. and European units to perform relatively well in a normalized market, though firmwide operating margin should stay in the high single digits in the long term.As Mexico’s second-largest chicken producer, Pilgrim’s should benefit as the economy develops and consumption rises (Mexico accounted for 12% of 2017 sales). While the market is different from its U.S. counterpart (live birds account for about 30% of Mexican poultry sales, and cut and value-added chicken comprises less of the market), higher margins and Mexico’s affinity for dark meat versus its white-meat-centric northern counterpart should boost economics while reducing cut demand mismatches.Though cost discipline has improved efficiency, much of what drives profitability is beyond Pilgrim’s control. Feed costs are influenced by factors as diverse as the weather and trade policy, and animal diseases threaten flocks and Pilgrim’s access to foreign markets. As margins are thin, Pilgrim’s has little room for error.