Margins Will Shrink Despite Capacity Expansion In US And Mexico

Key Takeaways

• Operational enhancements and partnerships with key customers in the U.S. drive revenue growth and margin improvements through innovation and product expansion.
  
• Strategic investments in sustainability and capacity expansion in Mexico aim to boost profitability by improving efficiencies and reducing costs.
  
• Strong financial performance, strategic capacity expansion, and consumer trends favoring home consumption support Pilgrim's Pride's potential for growth and competitive advantage.

Catalysts

Produces, processes, markets, and distributes fresh, frozen, and value-added chicken and pork products to retailers, distributors, and foodservice operators in the United States, Europe, and Mexico.

• Operational improvements and innovation in the U.S. business, along with the expansion of differentiated product offerings and partnerships with key customers, are expected to drive revenue growth and enhanced margins.
  
• Continued investment in expanding capacity for fresh and prepared foods in both the U.S. and Mexico is anticipated to bolster future revenue and potentially improve net margins through economies of scale.
  
• The focus on business integration, mix enhancements, and manufacturing optimization in Europe, alongside the launch of over 80 new products, is poised to support future profitability and revenue growth.
  
• Expansion efforts in the Mexican market, including capacity increases in Veracruz and Merida and growth in branded and value-added offerings, are expected to drive revenue and profitability improvements.
  
• Strategic investments in sustainability, including reducing greenhouse emissions and improving operational efficiency, aim to enhance net margins over time by reducing costs associated with energy and environmental impacts.

Pilgrim's Pride Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pilgrim's Pride's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.7% today to 4.9% in 3 years time.
• Analysts expect earnings to reach $928.7 million (and earnings per share of $3.64) by about May 2028, down from $1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.2 billion in earnings, and the most bearish expecting $764 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 9.2x today. This future PE is lower than the current PE for the US Food industry at 18.9x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Pilgrim's Pride Future Earnings Per Share Growth

Risks

• Pilgrim's Pride has shown significant growth in net revenues and adjusted EBITDA, indicating strong financial performance. This growth suggests resilience and potential further revenue and margin enhancements if current strategies continue to execute well.
  
• Continued strong demand for chicken at retail and institutional innovation, particularly in boneless skinless breast and dark meat, could drive revenue growth and margins as the company capitalizes on consumer trends favoring home consumption over dining out.
  
• The company is expanding its operational capacity in key markets, including the U.S., Mexico, and Europe, which could further support revenue growth and enhance net margins by increasing production efficiencies and market reach.
  
• Pilgrim's Pride maintains a strong liquidity position with substantial cash reserves and low leverage, allowing it to explore growth opportunities and manage financial volatility, thereby supporting earnings stability and potential expansion initiatives.
  
• Strategic investments in market differentiation, product innovation, and capacity expansion reflect potential for increased competitive advantage and market share, which could bolster future revenue streams and profitability.

Valuation

• The analysts have a consensus price target of $48.264 for Pilgrim's Pride based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $19.0 billion, earnings will come to $928.7 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $46.64, the analyst price target of $48.26 is 3.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.