Shrinking Profit Margins Will Lead To Earnings Decline Despite Mexico Expansion

Key Takeaways

• Expansion in Mexico and increased production capacity aim to boost revenue and capture growth in response to strong chicken demand.
  
• Enhanced protein conversion capacity and sustainability initiatives could drive future earnings and profitability while mitigating risks.
  
• Pilgrim's Pride's diversified portfolio and operational efficiency improvement drive potential revenue growth and enhanced margins, supported by strong demand and strategic investment capability.

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.

• Pilgrim's Pride is expanding its operations in Mexico to capture growth opportunities amidst strong chicken demand, promising increased revenue from this market as it invests in new production capacity.
  
• The company plans to increase its protein conversion capacity in the U.S., anticipating additional investment to enhance its product mix and manage risk, which is aimed at boosting future earnings and mitigating external operational dependencies.
  
• The U.S. chicken demand remains strong due to chicken's relative affordability versus other proteins, alongside expanded distribution in retail and foodservice sectors, indicating potential revenue growth.
  
• Europe operations have seen margin expansion through the optimization of the manufacturing network and consolidation of support functions, which is expected to improve net margins and increase profitability.
  
• Pilgrim's Pride is engaging in sustainability initiatives that could win incremental business from key customers, positively impacting revenue growth as animal welfare standards influence purchasing decisions.

Pilgrim's Pride Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pilgrim's Pride's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.1% today to 5.1% in 3 years time.
• Analysts expect earnings to reach $973.6 million (and earnings per share of $3.58) by about April 2028, down from $1.1 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 $763.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, up from 11.6x today. This future PE is lower than the current PE for the US Food industry at 16.8x.
• 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 successfully diversified its portfolio, capturing demand for differentiated products, which could positively impact revenue and net margins.
  
• The company improved operational efficiency, particularly in its U.S. Fresh portfolio and European manufacturing network, leading to expanded margins and potential earnings growth.
  
• There was strong and stable domestic demand for chicken, supported by its affordability compared to other proteins, likely benefiting sales and revenue.
  
• Pilgrim's Pride experienced significant growth in Mexico due to better supply-demand fundamentals and lower grain costs, which could enhance net margins and contribute to overall profitability.
  
• The company maintained a strong balance sheet with significant liquidity, allowing for potential investments in high-return projects and strategic growth initiatives, which could positively influence future earnings.

Valuation

• The analysts have a consensus price target of $49.571 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 $973.6 million, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of $53.34, the analyst price target of $49.57 is 7.6% 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.