Pilgrim’s Pride Corporation (NASDAQ:PPC) was one of the big movers in recent days. The stock jumped over 20% on nearly triple typical trading volume as its parent, JBS USA Holdings, forked out over $3 billion in cash and assumed debt for a Brazilian poultry unit, Seara. The move managed to evade the attention of anti-trust regulators as it purchased the unit from a larger rival, Marfrig Alimentos SA, in an area it’s not dominant: poultry and pork. However, the acquisition follows earlier acquisition behavior by Brazilian meatpackers as JBS seeks to grow market share in all aspects of meat production.
I first featured Pilgrim’s Pride Corporation (NASDAQ:PPC) in May of last year, after a buying surge in March was attributed to JBS USA increasing its stake in Pilgrim’s Pride to 75% from 68%. Friday’s news simply fanned the flames of rumor that perhaps JBS USA will want to increase its stake in Pilgrim’s Pride to something more than 75%. Whether there would be sufficient interest for JBS USA to increase its stake in a company which had traded in the $4’s not so long ago remains to be seen. I had taken advantage when it traded in the $4’s, and sold in the $8’s, but now it’s knocking around the mid-teens. There is nothing hard and fast to suggest JBS USA is interested in raising its stake, so it’s the day-to-day operations that will decide if Pilgrim’s Pride Corporation (NASDAQ:PPC) deserves the bump in price.
The company reported just below expectations in its most recent earnings release, although it was “the best first quarter results in recent history” for a traditionally weak quarter: up 39% year-over-year in net income. Feed costs are a perennial problem, but it’s possible JBS USA’s latest Brazilian acquisition may offer greater leverage with regards to the import of feed from South America; hedging its exposure to corn costs in North America. However, the company expects feed costs to moderate with larger harvests expected than in the prior two years, so the need to import will be reduced. Mexican operations have proven to be a bright spot, despite breeder losses due to Avian flu, but there were no hard numbers other than a $7.2 million exchange rate gain on sales of over $2 billion.
When relative performance is factored, Pilgrim’s Pride Corporation (NASDAQ:PPC) does look more attractive. In February, the stock was trading at a P/E of 30.5, but it’s now a far more appealing 19.2, with a forward P/E of just 9.0. Rival poultry processor Sanderson Farms, Inc. (NASDAQ:SAFM) trades at a trailing P/E of 29.5 and a forward P/E of 9.7.
Sanderson Farms, Inc. (NASDAQ:SAFM) has only recently pulled out of an eight-year price slumber. This despite a sequence of six consecutive quarters in the black (all close to earnings expectations). Expectations for Q3 are for $1.78 a share on $690 million in revenue, an increase of 40% on the comparable quarter from last year. Sanderson Farms, Inc. (NASDAQ:SAFM) experienced the same feed pricing pressures: Q2 feed costs were higher than the prior years’ Q2, but lower than Q1 of the current year. Interestingly, it was more pessimistic in the crop outlook for this year, noting not all acreage of coin expected to be planted this year by the USDA will be planted. It further noted, “Planting progress reports indicate that weather has caused near record low planting progress, although significant progress has been made over the second half of May.” The company did go on to state U.S. farmers could still harvest an excellent crop, which would mean lower grain (feed) costs, but that supply could be tight. The company had priced up to July, but not beyond. So Q1 or Q2 of next fiscal year could see some pressures on earnings and P/Es if stock remains were its priced or higher. This will have implications for Pilgrim’s Pride Corporation (NASDAQ:PPC) too.
Within the meat product sector, one of the strongest stock performers has been BRF SA (ADR) (NYSE:BRFS). The company is engaged in raising, producing and slaughtering poultry, pork and beef in Brazil. The stock has gone from nowhere (i.e. penny-stock status) to just shy of $25 over the space of 10 years, but the last few weeks have been telling in that the stock has struggled to keep its upward momentum, while the likes of Pilgrim’s Pride and Sanderson Farms have pushed higher.
As a Brazilian company its operations have the greatest relevance to JBS USA, and consequently, Pilgrim’s Pride. As a Brazilian company, it probably has been tarred with the turgid performance of the Bovespa. Supply and demand dynamics are also shifting, as Russia continued its move from major poultry importer, to domestic poultry producer with the help of state aid. The concern was Russia’s major source of import, the U.S., would look to shift exports into markets currently served by BRF SA (ADR) (NYSE:BRFS).
There was also the fallout from antitrust enforcement actions, which left the company struggling during times of increased demand for its products – a warning sign for JBS USA as it looks to expand.
Profit margins continued to shrink, now at 3.5%, down from 5.7% from late last year, or 8.2% from the early part of 2012. Granted, such margins were better than the 2.3% currently reported by Pilgrim’s Pride. Squeezed margins came from higher feed costs; higher feed costs attributed to labor pressures rather than low acreage cropping afflicting U.S. production.
Of the three stocks, Pilgrim’s Pride Corporation (NASDAQ:PPC) does look to be best positioned to take advantage of the changes in the market. BRF SA (ADR) (NYSE:BRFS) looks to have its best days behind it. The rise in its stock price was phenomenal; the company probably is in need of consolidation, even if simply to stabilize profit margins. Sanderson Foods does not appear to be as well- hedged against feed prices as Pilgrim’s Pride, and probably does not have the same level of resources to source feed from elsewhere.
It’s likely that the enthusiasm of the 20% surge in Pilgrim’s Pride Corporation (NASDAQ:PPC) price will fade with time, but recent earnings do support the market’s current evaluation of the stock. It’s one to watch.
The article This Stock Is Rising for the Wrong Reasons originally appeared on Fool.com and is written by Declan Fallon.
Declan Fallon has no position in any stocks mentioned. The Motley Fool owns shares of Sanderson Farms. Declan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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