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Pilgrim's Pride Looks Bland on Commodity Chicken, Cost Woes

Pilgrim's Pride Corporation PPC has been losing grounds for a while, thanks to hurdles related to commodity chicken and high costs. We note that shares of this Zacks Rank #4 (Sell) stock has declined 21.7% in the past year, while the S&P 500 rose 3.5%. Let’s take a closer look at the aspects that are affecting Pilgrim's Pride, which is part of the Food-Meat Products industry.

Commodity Chicken Volatility & Other Regional Woes

Pilgrim’s Pride has been witnessing tough commodity chicken market conditions in the United States for a while. Such headwinds along with adverse weather conditions across some locations dented revenues from U.S. operations in the fourth quarter. Moreover, management is concerned regarding the reduced demand of commodity chicken, considering high availability of other meat-based protein. Further, the United States Department of Agriculture (USDA) predicts that total chicken industry production growth in 2019 will be lower than 2018 levels.

We note that during the fourth quarter, the company witnessed a decline in Mexican and European operations. The European region was sluggish due to higher feed inputs stemming from drought conditions. Persistence of such regional headwinds may continue to mar the top line.

Rising Cost of Sales

Expanding cost of sales is a significant hurdle for Pilgrim’s Pride. Notably, during the fourth quarter of 2018, cost of sales rose 2.6% year over year. Moreover, lower sales and higher cost of sales caused gross profit to slump 57.3% in the said period, while gross margin fell 5.3 percentage points to 4.2%. Rising costs, if unchecked, can continue to hurt profits in the upcoming quarters. We note that rising costs have eclipsed performance of food companies like Campbell Soup CPB, General Mills GIS and TreeHouse Foods THS.

Wrapping up

Clearly, Pilgrim’s Pride’s performance has been unimpressive for a while now. Nevertheless, management is focusing on growth endeavors such as innovation, augmenting marketing support of brands and improving supply-chain operations by implementing enhanced technology. Moreover, the company’s Prepared Foods business is performing well on the back of strong brands. We hope that such upsides will revive the stock in the forthcoming periods.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Pilgrim's Pride Corporation (PPC): Free Stock Analysis Report
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