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Jonathan Poland
Jonathan Poland
Articles (368)  | Author's Website |

Pilgrims Pride Is a Massive Bargain

Priced at 8 times earnings and 2 points off its 52-week low, it is a recession-proof business

September 20, 2018 | About:

Pilgrims Pride Corp. (NASDAQ:PPC) is the second-largest chicken producer in the United States, a $60 billion industry. In the last 12 months, the company has booked $592 million in net income on $11.1 billion in revenue; with a $4.6 billion market cap, the stock continues to trade like its going out of business again. Pilgrim's Pride came out of bankruptcy in 2009, but has done a spectacular job since then.

2018, however, did not get off to the best start. In February, the company was sued by Sysco (NYSE:SYY) and U.S. Foods (NYSE:USFD) for allegedly overpaying for chicken for a number of years due to collusion among Tyson Foods (NYSE:TSN), Pilgrims Pride, Sanderson Farms (NASDAQ:SAFM) and others. The suit was tossed in mid-March, but by that point the stock was already off 16% and is now down 50% since the 52-week high last December. Then, in August, tariffs were placed on U.S.-produced meat, threatening demand and forcing meat companies to drop prices to prevent inventory from piling up.

These events have contributed to the declining stock price, giving long-term minded investors a great buying opportunity. While the company operates in a commoditized industry, it does have some brand recognition and the ability to be a low-cost producer. About 69% of its sales are generated in the U.S., 19% from Europe and 12% from Mexico.

More importantly, all the valuation metrics are below its historic as well as industry averages. Any readjustment higher will mean good things for owners at this price point.

Five-year average

Price-earnings ratio: 11.5
Price-book ratio: 4.6
Price-sales ratio: 0.7

Price-earnings ratio: 7.8
Price-book ratio: 2.3
Price-sales ratio: 0.4

Investors are compensated on what the company can do in the future. Demand for chicken products will continue to rise regardless of any trade skirmish that is currently taking place. Pilgrims Pride will be one of the leaders to fill that need.

Financially speaking, the company is expected to earn roughly $2 per share in each of the next two years, down from $3 just 60 days ago, another reason the stock has continued to sell off. Yet, if this was a private business, the owner would recoup 20% of his or her investment in under two years. Pilgrims Pride is not going out of business. Debt levels as a percentage of net income are manageable at just four times earnings. The company has $640 million in cash and generates $771 million in operating cash flow annually.

From a brand standpoint, Pilgrims core products may be difficult to differentiate and are essentially commodities; however, people will continue to consume chicken and it doesn't have to have strong brand awareness among consumers, just to the suppliers who are its real customers. This stock will not be cheap forever.

Disclosure: I am not long or short any stocks mentioned in this article.

About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager, publisher and analyst who helped investors produce market-beating results for over 15 years.

Visit Jonathan Poland's Website

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Performances of the stocks mentioned by Jonathan Poland

User Generated Screeners

aboer52-29 DN Prof▼5Pred▼1Pi▼5J
aboer52-36 Bottom 20% of industries
aboer52-165 Bad ROE
aboer52-225 dn Op Mgn < 20th percenti
aboer52-451 dn Warn><1 Finan<6 Profit
aboer52-88 Profit<=5 Warnings >=3
aboer52-356 DN <6<6
aboer52-178 DN <6<6 Benish>-5 AZ<3
aboer52-104 DN Piot<=3
aboer52-28 DN Basis1maxFPP565 OPN<30%
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