Pilgrim's Pride Shares Surged: What You Need to Know

By Anders Bylund | More Articles
September 30, 2011 | Comments (3)

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of alliterative poultry-products producer Pilgrim's Pride (NYSE: PPC ) soared to intraday gains of 13.4% on mighty chicken wings and fairly heavy volume.

So what: The USDA reported a higher corn supply than expected, sending corn prices down and heavy corn users skyward. Pilgrim's rivals Tyson Foods (NYSE: TSN ) , Sanderson Farms (Nasdaq: SAFM ) , and Smithfield Foods (NYSE: SFD ) all jumped more than 4% on the news despite a gloomy market with the DJIA (Index: ^DJI) spending all day in the red.

Now what: I find Pilgrim's jump somewhat curious under these conditions. After all, Pilgrim and Tyson hedge their corn prices to a much greater extent than Tyson does, yet Pilgrim is the bird that soars on positive pricing news. Are investors assuming that the company will lock in the new, lower corn prices for months on end? I'd keep an eye on this turkey and its one-star CAPS rating, but it's not a good time to back up the truck.

Interested in more information about Pilgrim's Pride? Add it to My Watchlist.

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Fool contributor Anders Bylund holds no position in any of the companies discussed here. He doesn't even like chicken. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is investors writing for investors.

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Report this Comment On September 30, 2011, at 2:01 PM, Xterik123 wrote:

@ Anders. it is well known that TSN and PPC hedge for longer durations than SAFM, which is closer to the spot. PPC i believe is near $6.30/bu on Corn for 2011. But on valuations, PPC was at Price/Tangible Book of just 1.1x (before today's jump) vs. TSN at 1.6x and SAFM at 1.9x. The market was seriously concerned about PPC's liquidity after they had to pull down another $50 mn from JBS few months back. With Corn now a full 200 cents/bu off highs, this reasonably assures that PPC's feed costs for 2012 wont be as high as the market was fearing.
On the other hand, Chicken prices have been trending up lately. Urner Barry Chicken prices jumped from $0.59/Lbs to $0.67 over the past 5 weeks (a jump of more than 13%) on 20 weeks of consistently lower eggs set/pullet placements.
The Co will also benefit from adopting the Agri Stats system (PPC was in top 25% of industry on operating margins for June based on Agri Stats). Also, manual deboning will add 1% to the yield. besides, PPC is aggressively expanding its exports thro JBS, capturing market share from rivals.
Thus, looking at PPC's depressed valuations vs. peers, the assurance of further JBS support, lower feed costs for FY12 and improving chicken prices, the move up is fully deserved !
Report this Comment On September 30, 2011, at 2:59 PM, TMFZahrim wrote:

Thanks for the assist, @Xterik123!
Anders
Report this Comment On September 30, 2011, at 3:13 PM, Xterik123 wrote:

My pleasure Anders. Big fan of Motley Fool :)
Xterik

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