Calculated Partnerships And Innovations Poised To Transform Retail And Food Service Revenue Growth

Key Takeaways

• Strategic growth in customer partnerships and diversification in Prepared Foods aim to drive revenue growth through innovation and branding.
  
• Focus on operational efficiencies and favorable grain price movements are projected to significantly enhance net margins by reducing costs.
  
• Fluctuating grain prices, trade disruptions, expansion risks, competitive pressures, and cost-plus contracts in Europe could significantly impact margins and revenues.

Catalysts

Produces, processes, markets, and distributes fresh, frozen, and value-added chicken and pork products to retailers, distributors, and foodservice operators.

• Pilgrim's Pride is expected to benefit from increased net revenues through strategic growth in key customer partnerships in retail, driven by differentiated offerings, promotional activities, and innovation, impacting revenue positively.
  
• The company's focus on operational efficiencies, particularly in its Big Bird and Small Bird segments, alongside reduced grain input costs, is anticipated to boost net margins through significant margin expansion.
  
• Investments in Prepared Foods and diversification efforts, especially in branded offerings and innovation across both retail and food service channels, aim to create additional demand and are likely to drive revenue growth.
  
• Pilgrim's operational excellence and capacity increase efforts, especially in the context of reducing biosecurity risks, are projected to enhance production efficiency, thereby reducing costs and improving net margins.
  
• The favorable grain price movements and increased acreage for U.S. corn and soy are expected to contribute to lower feed costs, impacting overall profitability and earnings positively by reducing operating expenses.

Assumptions

• Analysts are assuming Pilgrim's Pride's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.2% today to 4.0% in 3 years time.
• Analysts expect earnings to reach $747.7 million (and earnings per share of $3.39) by about October 2027, down from $756.7 million today.
• 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 2027 earnings, up from 14.0x today. This future PE is lower than the current PE for the US Food industry at 17.9x.
• Analysts expect the number of shares outstanding to decline by 2.38% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The fluctuation in grain prices could impact operating margins if there's an unexpected increase in costs for feed, potentially reducing net margins despite the current favorable conditions.
  
• International trade disruptions or regulatory changes, especially in key markets or due to disease outbreaks in poultry, might lead to volatility in export volumes, impacting revenue.
  
• The company's heavy investment in growth and expansion, including into new geographies or product lines, carries execution risk which could affect return on investment and earnings.
  
• Competitive pressures in the protein market, both domestically and internationally, could impact market share, pricing power, and ultimately revenue.
  
• Reliance on cost-plus contracts, particularly in Europe, could lead to margin compression if input costs rise unexpectedly, impacting EBITDA margins.

Valuation

• The analysts have a consensus price target of $42.5 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 $47.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.7 billion, earnings will come to $747.7 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 5.8%.
• Given the current share price of $44.74, the analyst's price target of $42.5 is 5.3% lower. 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.