Pilgrim’s Pride Corporation (PPC): This Stock Is Rising for the Wrong Reasons

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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.

Pilgrim's Pride Corporation (NASDAQ:PPC)

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.

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