Chicken Trade Down And Rising Broiler Supply Will Limit Margins And Keep Shares Fairly Valued

Catalysts

About Pilgrim's Pride

Pilgrim's Pride is a global poultry and prepared foods company supplying fresh and value added chicken and pork products to retail, foodservice and export customers.

What are the underlying business or industry changes driving this perspective?

• Although continued consumer trade down to chicken from higher priced beef supports steady volume growth, elevated U.S. industry utilization and USDA projected broiler supply increases between 2 and 3% limit Pilgrim's pricing power and could cap revenue growth and compress net margins if demand moderates.
• Despite expanding Case Ready and Prepared Foods capacity in the U.S. and Mexico to shift mix toward higher value products, integration risk, timing lags between higher input costs and pricing, and execution issues at new facilities may prevent the expected uplift in EBITDA margins and earnings from fully materializing.
• While global grain balances currently point to ample corn and soybean meal supply and lower feed costs, weather volatility in South America and changing trade flows could quickly re tighten feed markets, reversing a key tailwind for operating costs and putting pressure on margins and cash flow.
• Although branded and value added offerings such as Just BARE, Fridge Raiders and Richmond are gaining share, intensifying competition from private label and imported meats in Europe and retailer pushback on price increases could slow mix improvement and weigh on long term margin expansion and earnings growth.
• While geographic and channel diversification across the U.S., Europe and Mexico helps mitigate localized demand shocks, ongoing exposure to disease outbreaks, shifting export market access and regulatory changes in major importers like China may produce episodic volume disruptions and earnings volatility.

Assumptions

This narrative explores a more pessimistic perspective on Pilgrim's Pride compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Pilgrim's Pride's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 6.7% today to 3.6% in 3 years time.
• The bearish analysts expect earnings to reach $678.0 million (and earnings per share of $3.19) by about December 2028, down from $1.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.0 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, up from 7.7x today. This future PE is lower than the current PE for the US Food industry at 20.2x.
• The bearish analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is executing a large, multi year capital expenditure plan of roughly $700 million for new Case Ready, Prepared Foods and Mexican facilities. If these projects deliver higher than expected returns or ramp faster than anticipated, structurally higher cash generation could drive earnings growth and a higher valuation multiple, supporting a sustained increase in the share price through stronger EBITDA and net income.
• Long term consumer trade down from beef and other more expensive proteins toward chicken, combined with record wide price spreads that favor poultry, is underpinning robust demand in both retail and QSR channels. If this secular shift endures or accelerates, Pilgrim's volumes and pricing power could improve more than expected, lifting revenue growth and expanding net margins.
• The ongoing shift in mix toward higher value branded and Prepared Foods offerings such as Just BARE, Richmond, Fridge Raiders and Ping's, supported by new state of the art plants and innovation, may steadily reduce exposure to volatile commodity markets and raise average selling prices. This would support structurally higher EBITDA margins and earnings over time.
• Diversification across geographies and channels in the U.S., Europe and Mexico, combined with investments in operational excellence, network optimization and biosecurity, is already supporting relatively resilient performance despite market swings. Further efficiency gains or successful value added partnerships with key customers could deliver margin expansion and earnings growth that the current share price does not fully discount.
• Stable to ample global supplies of key feed inputs such as corn, soybeans and wheat, alongside improved live performance and hatchability, reduce cost pressure relative to past cycles. If input costs remain benign while Pilgrim's continues to optimize operations, the company could sustain elevated EBITDA margins versus historical averages, increasing free cash flow and supporting a higher share price over the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Pilgrim's Pride is $40.0, which represents up to two standard deviations below the consensus price target of $43.57. This valuation is based on what can be assumed as the expectations of Pilgrim's Pride's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $56.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $18.8 billion, earnings will come to $678.0 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $39.97, the analyst price target of $40.0 is 0.1% 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.