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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