Pilgrim’s takes pride in rebound

GREELEY – Pilgrim’s Pride Corp.’s income has shot up this year on lower feed costs and higher chicken prices, and the company could see continued good fortune next year.

Just five years after it filed for bankruptcy protection and four years after Greeley-based JBS USA bought a controlling interest in the firm, Pilgrim’s Pride, the world’s second-largest chicken producer, is flying high.

Pilgrim’s Pride (Nasdaq: PPC), based in Greeley, saw its third-quarter net income nearly quadruple to $160.9 million from $42.9 million during the same period last year. Meanwhile, the company’s stock has risen sharply in the past year to about $14 per share, up from less than $6 this time last year.

During the drought in 2012, chicken processors such as Pilgrim’s struggled as corn and soybeans used in chicken feed neared record high prices. Corn rose to $8 a bushel and soybeans surpassed $16 on the Chicago Mercantile Exchange. Investors flew the coop on shares of Pilgrim’s and other chicken processors such as Tyson Foods Inc. (NYSE: TFN) and Sanderson Farms Inc. (Nasdaq: SAFM).

This year, Pilgrim’s earnings have soared to $406.2 million during the first three quarters of 2013 versus $151.7 million during the same period last year. Corn futures, meanwhile, have fallen to slightly more than $4, and soybean futures have declined to around $12.

Chicken prices have remained above last year’s prices and above the five-year average during most of the past year, according to data from Pilgrim’s.

Lower feed costs in particular have buoyed the entire chicken industry, said Tom Super, spokesman for the National Chicken Council.

“Chicken isn’t much more than soybean and cornmeal on two legs,” Super said. “So with the feed prices stabilizing, we’ve had a much better economic climate.”

Cash flows from operations amounted to $285.8 million for the quarter, allowing Pilgrim’s Pride to reduce its debt by $252 million. Pilgrim’s ended the quarter with $582.1 million in net debt. Its net debt was $1.4 billion in 2011.

Greeley-based JBS USA, a subsidiary of Sao Paulo, Brazil-based JBS S.A., owns a controlling interest in Pilgrim’s, which employs about 37,500 people and operates chicken processing plants and prepared-foods facilities in 12 states, Puerto Rico and Mexico. The company’s primary distribution is through retailers and food-service distributors.

Pilgrim’s has made a turnaround since the company filed for Chapter 11 bankruptcy protection in 2008. JBS bought a majority interest in the company a year later.

Investors were concerned about the company’s future at the time, said Ian Corydon, director of research for Los Angeles area analyst firm B. Riley & Co. LLC. Pilgrim’s has since made moves to decrease its debt and bolster its earnings.

“I think those concerns are gone now,” he said.

B. Riley, although it maintained its rating Pilgrim’s stock as “neutral” after Pilgrim’s third quarter earnings, has raised its price target to $16.25 from $15.25. The neutral rating was maintained because B. Riley believes chicken prices will normalize with increased production.

“Overall, we think the future’s pretty bright for this company,” Corydon said.

Corydon sees Mexico as one of the leading locations for Pilgrim’s growth, with the Middle East another key growth market. Consumers overseas tend to prefer dark meat, the least expensive cuts of chicken, as well as whole chicken.

“If you look at emerging markets, in general, where people are getting wealthier, they want to consume more protein,” he said. “Chicken is the most cost effective protein source.”

“I think there’s going to be a global increase in chicken consumption, and the U.S. is a great place to produce chicken for export, so I think they benefit from that,” he added.

Pilgrim’s Pride did not respond to a request for comment for this article, but chief executive Bill Lovette said during an earnings conference call Oct. 31 that the company will continue exports to the Middle East, which has the highest per capita rate of chicken consumption in the world.

“We don’t believe that’s going to change,” he said. “We believe that continued population growth and continued economic benefits and more people moving into the middle class is going to continue to move that number forward.”

Pilgrim’s faced some challenges during the third quarter, however. Revenues from its exports to Mexico declined 3.4 percent after an oversupply of chicken in the market.

Pilgrim’s faces risks including feed-cost volatility, Corydon said. Also, the industry tends to produce an oversupply of chicken during good times, leading to price decreases.

Stephen Koontz, Colorado State University associate professor and extension economist, believes chicken processors indeed will increase production, leading to lower chicken prices and squeezing margins for processors such as that of Pilgrim’s.

“With poultry prices where they are, they will have some incentive to expand,” he said. “The poultry industry appears to be aggressive, if there’s money to be made.”

Still, a diminished beef cattle herd because of drought conditions also could help chicken producers such as that of Pilgrim’s, experts say. As beef prices rise, chicken becomes the more affordable option.

“There’s nothing that the beef industry can do,” Koontz said. “They need a couple years of expansion to get production back. They’ve just been hammered by high feed costs and drought.”

The National Chicken Council forecasts an average 83.3 pounds of per capita chicken consumption next year, 1.5 pounds more than this year. Super cautioned that chicken processers’ bottom lines, however, largely depend on the weather.

“One swipe from Mother Nature, like we witnessed last year, could wipe out all of that,” he said, “especially as we try to recover from the drought.”

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