Here again we see a good reason to be a little wary before buying into a commodity company. Management at Pilgrim's Pride (NYSE: PPC ) didn't get any less smart or less competent in the past year, nor did their chicken suddenly meet with revulsion by the consumer. Instead, the simple reality is that prices fell hard and there was pretty much nothing they could do about it.
Sales were down 11% this quarter, with core chicken sales down about 9%. If you're looking for bright spots, it's a pretty quick search; prepared foods revenue was flat -- and that's about as good as it gets. Things look pretty henpecked throughout the rest of the income statement. Gross margins fell precipitously, operating income turned into a loss, and the company's EBITDA (earnings before interest, taxes, depreciation, and amortization) for the quarter was barely positive.
Speaking of that pricing, the company reported that leg quarter prices more than doubled from the prior quarter, but were still down more than a third from last year's level. A similar scenario played out in the less export-sensitive breast meat, where prices were up over 36% sequentially, and down more than 16% annually.
Like Tyson (NYSE: TSN ) , Sanderson Farms (Nasdaq: SAFM ) , and GoldKist (Nasdaq: GKIS ) , there isn't much left to do other than cut back production, cut costs, and hunker down until pricing improves. And while there is some optimism that pricing could improve by year-end, let's just say I'm not counting any of those chickens before they hatch.
Ultimately, Pilgrim's Pride will emerge from this and start making money again. After all, the company is not overly threatened by debt and it's not as though the chicken market will vanish. Further, there's always the long-term potential to do more business with big buyers like Wal-Mart (NYSE: WMT ) , SYSCO (NYSE: SYY ) , and Target (NYSE: TGT ) .
While there may not be a lot of operational risk left in this stock's valuation, the markets still have a way of reacting quite negatively to information that you or I might have already assumed was widely known. As a result, any value hounds who want to start nibbling at these shares should remember that chickens occasionally bite and markets can always manage to get just a little more pessimistic in the short run.
For more fowlish Foolishness:
- Tyson Hopes You Feel Like Chicken Tonight
- Sanderson Farms' Chicken Run
- Playing Chicken With Chickens
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).