Pilgrim’s Pride Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Pilgrim’s Pride Corporation (PPC) is one of the largest chicken producers in the world, with operations in the United States, Mexico and Europe.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

PPC is a leading producer of fresh and value-added chicken products. The company’s operations are primarily divided into three segments: U.S., Mexico, and Europe. The U.S. market is the company’s biggest revenue source, with the products being processed fresh chicken, chicken parts, and prepared food. Mexico focuses on a mix of fresh and frozen chicken products. Europe has a value-added strategy, with a focus on product and process innovations and branded products.

The company’s primary business operation revolves around producing and processing chicken. The company is subject to global macroeconomic trends as well as fluctuations in commodity prices.

  • Global Inflation: The entire poultry industry has been impacted by high global inflation, which has led to increasing raw material costs including corn, soy meal, soybean oil, and other feed ingredients, all of which are essential for chicken production.
  • Market Volatility: Fluctuations in demand, particularly due to changing global economic conditions are increasing market volatility.
  • Disease Outbreaks: Fluctuations in supply, particularly within the United States, have impacted domestic demand for chicken. The potential for outbreaks of diseases in chicken flocks also remains a risk for the poultry industry.

In the last few years, the company’s revenue has been impacted by inflationary environments. While in 2021, the company did benefit from high prices, that has since changed.

Competitive Landscape

  • The chicken and pork industries in the U.S. market, which include companies like Tyson Foods, JBS and Sanderson Farms are highly competitive with pricing being a key differentiator.
  • The main players in the European poultry market consist of major corporations such as Plukon, 2 Sisters, and LDC which are highly consolidated and large.
  • PPC faces tough competition within the Mexican poultry market and needs to continue to build and expand its production, processing, marketing, and distribution abilities to gain long term success.

Competition in the poultry industry is intense, and companies must focus on cost control, innovation, and brand building to maintain profitability and gain or retain market share.

Moat Assessment: 2/5

PPC’s moat is not wide, but the company does have a narrow moat. Here’s why:

  • Scale Advantages: PPC is one of the biggest players in the poultry industry. While scale is not a sufficient condition for a wide moat, a huge scale allows for production and distribution efficiencies, which can keep production costs slightly lower for them and helps give them some pricing power.
  • Brands and Customer Relationships: In some of the areas, such as prepared food and branded chicken, the company does have a good reputation with good customer relationships. However, these are easy to replicate in certain sectors of the business, making them less useful overall.
  • Regulatory and Government Contracts: For their Mexican operations, the company primarily focuses on long term contracts with the government.

The presence of these moats are fragile. For an investor the most important factor to consider when evaluating PPC is their execution and operational efficiency. Even though the company has a narrow moat, without operational excellence or unique advantages, their moat can vanish.

Risks to the Moat

  • Commodity Prices: Fluctuating feed and grain prices as well as the potential for supply chain disruptions could hurt the company’s profit margins if it’s not able to pass these costs on. Since they are unable to have price differentiation on their products, they are unable to pass the costs to the consumer.
  • Disease outbreaks: Major outbreaks of avian influenza could lead to supply disruptions and increase volatility in profitability.
  • Regulation: A change in government regulation or food safety standards could increase operating costs and reduce profitability for a considerable time.
  • Brand Power: In a competitive consumer market, a decline in brand power can hurt the company’s profits and market position, and make it harder for them to differentiate or price their products more profitably.
  • Competition: Competitors could choose to lower prices to gain market share, which may affect margins across the industry, and force the company to choose whether to continue to maintain price-to-value, or lose sales and market share. This could severely hamper profitability.

Business Resilience

  • Diversification: The global nature of its operations helps to reduce risk in case of geopolitical tensions and regional economic downturns.
  • Product mix: The company has a diversified mix of products, reducing the risk of over reliance on particular items and categories. However, it is yet to diversify into non-commodity items.
  • Vertical integration: Having manufacturing capabilities also allows them to somewhat control the business.

Despite these points, the company remains primarily focused on the cyclical commodity business and lacks pricing power, which can make the company’s performance more volatile.

Financial Deep Dive

  • Revenues: PPC’s revenues are diverse across the United States, Europe, and Mexico, where the sales numbers fluctuate quite substantially depending on the period. Overall revenue growth is highly impacted by commodity prices and inflation.

PPC reports revenue in three different segments, U.S, Mexico, and Europe. As of 2022, the highest share of revenues (nearly 68%) was attributed to U.S. operations, followed by European, and finally, the Mexican segment.

  • Profitability: The company’s profitability is highly dependent on the cost of commodity inputs. Despite that, the company’s operating margin has improved significantly between 2021 and 2023. The company’s margins are somewhat volatile.
  • They are unable to pass down input costs to their customers.

  • High debt burdens put pressure on their income statement.

  • Balance Sheet: PPC’s balance sheet is a cause of concern. While there is a cash position of roughly $300M, the company has high amounts of debt of around $2.5B. However, the company has increased shareholder’s equity from $1.8B in 2021 to roughly $2.9B in 2022.

The high debt-to-equity ratio can affect the company’s ability to secure financing and could make it more vulnerable to economic down turns.

  • Cash Flows: Cash flows are heavily impacted by the volatility of commodity prices and changes in the business.

As of September 2022, operating activities led to a cash flow of $116.8M, but financing activities consumed nearly $250M. However, this does not paint the entire picture, because from July 2022, to Dec 2022, the company had positive cash flows of roughly $500M, showing a good improvement for the second half of the year.

  • Key Financial Metrics:

    • Return on Capital Employed (ROIC): ROIC has improved in recent years, reaching above 20%, while traditionally it remains in single digits. High fluctuations make the predictability of returns over a long period hard to estimate.
    • They have increased their sales significantly, but returns are still volatile.
    • Gross Margins: Gross margins were 15.5% in September 2022, down from 19.8% in September 2021, but that is mainly due to one-time charges in the prior year, and not a reflection of a decline in business.
    • Earnings per share: diluted earnings per share were up to 3.23 in 2021, but were down to 0.7 in 2022.

The company has significant exposure to commodity and currency fluctuations. Management has improved operations, and is working to reduce debt.

Recent Concerns / Controversies

  • CEO Resignation: The CEO resigned unexpectedly in early November 2022, leading to some uncertainty about the leadership.
  • Debt Burden: High debt is a main problem for the company which they are working to reduce. A significant interest expense cuts into profit and margins.
  • Inflationary Environment: The rising cost of commodities such as corn and soya beans, along with supply chain issues, have been hurting the company’s profitability and creating concerns about sustainability of operations in the medium term.

Management has acknowledged these problems, and are working to restructure the supply chain and decrease debt. They have also outlined how they will continue to deliver on the strategy to meet long term goals, despite the uncertain economic conditions.

Understandability: 2/5

PPC’s business, while seemingly straightforward, requires an understanding of the poultry industry, the impacts of market fluctuations on commodity prices, the dynamics of the global supply chain, and the influence of government regulations and contracts. Therefore, it is fairly complicated to understand for a normal person.

Balance Sheet Health: 3/5

While the company has significantly improved its equity position, it still carries a high debt balance of around $2.5B, making them slightly over leveraged in their business model. There are also risks of fluctuating financial conditions because of changing interest rates, which means that the overall financial health is moderately good.

The company needs to decrease its debt further and increase cash flows to gain an excellent level of balance sheet health.

In summary, while Pilgrim’s Pride has some economic moats and potential avenues for growth, the company operates within a highly competitive and uncertain market environment with many external risks affecting its long term value. Careful evaluation of company financials and execution must be the basis of any informed investment decision.