Tuesday, March 07, 2006

Pilgrim's Pride--"The Sky is Falling!"

Pilgrim's Pride Corp. (PPC-$22.54), with a 15.4% footprint in the geographical U.S.A, is one of the nation's largest poultry producer, second only to Tyson Foods, Inc. (TSN), the market leader with a 23.2% national reach (as of December 2004).
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Pilgrim’s Pride said recently that it was withdrawing its previously issued guidance for the second quarter and fiscal 2006, citing depressed prices for some chicken exports brought on by consumer fears of bird flu. Chicken leg-quarter prices on a full-load delivered basis into the U.S. northeast currently are quoted at 18 to 19 cents per pound, down more than 60% from the end of the third quarter 2005. Leg-quarter prices at this time a year ago were around 31 to 32 cents into the Northeast.
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The company did note, too, that during the current quarter its U.S. operations have sustained a loss of roughly $15 million, or 23 cents per share.
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A backward peak at the Company’s 10-Q filing for the three-months ended December 31, 2005, does give us a foreboding of the challenging operational environment facing corporate in the coming months:
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Net income for the first fiscal quarter of 2006 was down $22.8 million, or 47.1%, from the first fiscal quarter of 2005. This decrease was primarily driven by:
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  • · Increased cost of sales due to increased energy costs, higher freight delivery costs and higher soybean meal costs. Comparing the 1Q:06 to the same period last year, feed ingredient costs rose in the U.S. 3.6% and in Mexico 9.0%, due primarily to freight and soybean meal prices. [ed note. Feed ingredient purchases are the single largest component of cost of sales, representing approximately 26% of consolidated cost.].
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  • · Selling prices in Mexico dropped sharply due to an oversupply situation that occurred during the quarter. [The Company’s second largest market.] Selling prices were off 13.1% from the prior year period.
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  • · Market disruptions caused by avian influenza scares in other parts of the world compounded by shipping disruptions created during the recent hurricane season have affected the selling prices for chicken parts in the U.S. and overseas.
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Gross profit in the 1Q:06 and in the 1Q:05 were 8.8% and 11.8%, respectively. This loss of 300 basis points was because cost of sales increased $34.6 million, due primarily to increased energy costs and transportation costs created by fuel cost increases along with an increase in the cost of soybean meal. Might investors have seen that one coming?
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Misery loves company. Filed under RELATED TRANSACTIONS:
  • Lonnie “Bo” Pilgrim, the Chairman and, through certain related entities, the major stockholder of the, owns an egg laying and a chicken growing operation. In addition, at certain times during the year, BO purchases from the Company live chickens and hens and certain feed inventories during the grow-out process and then contracts with the Company to resell the birds at maturity. Purchases made by the Company under this agreement resulted in an operating margin to BO of $4,539 and $525,728 during the quarters ended December 31, 2005 and January 1, 2005, respectively, on gross amounts paid by the Company to BO. See even BO Knows—current times are tough.
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In our opinion, fears that bird flu in poultry poses a food safety risk is overblown. In fact, what is not being heard above all this clucking about avian flu is that most health experts are in consensus that bird flu in poultry does not pose a significant food safety risk; it is unlikely a sick chicken would be killed for consumption, and cooking meat and eggs would kill the virus.
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Investors ought to note, too, that salmonella and listeria pose more of a risk to consumers than bird flu.
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Once consumer’s fears start to ebb, Pilgrim’s Pride ought to benefit handsomely, for it is the largest, vertically-integrated pure-play company in poultry. The compounded annual 5-year ORGANIC growth rate has been 6.0 percent.
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Pilgrim's Pride did say that it intends to provide full-year guidance in its next quarterly conference call scheduled for May 2. Management is already talking down guidance for the 2Q:06, too, stating: “Unless there's a change in the price realization for leg quarters, [we] see no reason that this trend will not continue for the remainder of the second fiscal quarter."
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Beyond the current quarter, Pilgrim's Pride said it expects market conditions to improve into summer—the traditional chicken & steaks on the grill season—which is historically a strong period for the poultry industry.
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Looking at the Company’s balance sheet, Pilgrim’s Pride should not have a problem riding out the current bird plague. As of the first quarter ended December 31, 2006, a review of the Company’s Debt-Maturity profile shows that of the $517.2 million in corporate debt, principal repayment of $302.6 million is not due until FY 2011. Interest expense as a percentage of net sales was approximately 0.6 percent.
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The Efficient Market Hypothesis (EMH) states that at any given time, security prices fully reflect all available information. The implications of this EMH signal to us that at its current price of $22.54 per share, the risk intrinsic to owning Pilgrim’s Pride stock is built in and has already been discounted by Wall Street. However, the 10Q Detective does not believe that the markets are efficient, for people do not also process known facts the same way, nor do investors always act rationally!
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Pilgrim’s Pride's sports operating margins and ROE of 6.93% and 10.09%, respectively. These performance metrics are 2x those of industry leader, Tyson Foods (TSN), yet the stock price yield’s a P/E multiple of 6—which is one-half the 12x EPS value stamped on Tyson by Wall Street.
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The 10Q Detective is confident that longer-term, Pilrim’s Pride is an attractive Buy. The problem is—at what price? Technically, the stock is selling well below its 200-day moving average of $30.83 per share—and is bouncing off its two-year historic lows. Keep in mind that the tangible book value is approximately $17.67 per share.
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At present we do not believe that Wall Street has discounted the “what if” risk should birds start dying en masse on America’s shores. Perchance the best lead as to when to start buying shares is to closely monitor insider transactions—the buys and sells.
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Or, our readers might just spot the signal to be a buyer by reading the Nursery Rhyme, Chicken Little:
  • .
    Chicken Little was in the woods,
  • A seed fell on his tail.
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  • He met Henny Penny and said,
  • "The sky is falling.
  • I saw it with my eyes.
  • I heard it with my ears.
  • Some of it fell on my tail."
  • .
  • He met Turkey Lurkey, Ducky Lucky, and Goosey Loosey.
  • They ran to tell the king....
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When investors think that the sky is falling—that will be the time to Buy Pilgrim’s Pride.

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