Pilgrim's Pride (NYSE: PPC ) recently announced fourth-quarter and full-year earnings. Possibly anticipating good news, buyers sent the stock started rising a couple days prior, and it is now up over 25% since February 15. Sounds like the early buyers were right and some great news came out in the earnings release, right?
No! There was, at best, a glimmer of good news. At worst, this is a dead stock walking. I made an underperform call on CAPS several weeks ago, and thought it such a no-brainer I didn't even bother to announce it in an article at the time, but it seems I ought to now.
First, the good news
There were two pieces of good news. The falling price of corn and the rising price of chicken meat meant that Pilgrim's was able to improve gross margin, finally returning to positive territory. Between the third and fourth quarter, operating margins improved about 4%, a very significant jump, though still in negative territory.
The second piece of good news was that margins recovered enough for the company to return to profitability sometime in December, finally ending a long and painful streak of losses. It was still a losing quarter, but investors are hoping the improving trend will continue.
Now, the bad news
The bad news is, although margins may be improving and the company may have finally had a month of profit, but it's all too little too late.
Interest payment on the company's debt averages about $25 million to $30 million per quarter. A year ago, Pilgrim's had just about $175 million in cash and short-term investments. Now it's just about $50 million. You can watch the cash just tick down $25 million to 30 million each quarter as they gradually run out.
The plan to deal with the looming risk of a second default in three years is to raise cash. Pilgrim's has secured a $100 million loan from JBS, its majority shareholder, and is also issuing a rights offering of 44.4 million shares intended to raise $200 million. The rights offering will increase shares outstanding by about 20%, significantly diluting earnings, and the loan from JBS only adds to the $1.46 billion in long-term debt Pilgrim's currently has.
It gets worse
Pilgrim's wants to blame the macro environment for its troubles, and that's fair to some extent. Chicken production was one of the worst industries to be in last year. But Pilgrim's was the worst of the worst.
For example, investors seem excited that Pilgrim's returned to profitability in December. But the chicken division at Tyson Foods, on the other hand, returned to profitability months earlier in October.
Brasil Foods (NYSE: BRFS ) doesn't report profits for individual operating segments, but in October it did disclose that the chicken segment made up 31.8% of sales, and the company managed a 25.5% gross margin for the quarter, so it should be safe to assume they're doing something right.
One thing to note is that only 5.1% of Brasil Foods' total sales came from chicken sales made in the company's domestic market (Brazil). The rest came from exports. Pilgrim's Pride is hoping to boost its own operations by leaning more heavily on exports, but they'll have a tough road ahead. The top five exporters control 89% of the market. Pilgrim's Pride may now be majority-owned by the world's largest meat producer, but Brasil Foods is the world's largest poultry exporter.
Sanderson Farms (NYSE: SAFM ) returned to profitability only in January, so Pilgrim's has one competitor beat. However, Sanderson is coping with its losses by cutting back on production, hoping to wait things out until the macro picture clears up. Unlike Pilgrim's, Sanderson can afford to do this because it isn't drowning in debt, and so far it hasn't had to issue any more debt or dilute current shareholders.
The Foolish bottom line
Pilgrim's Pride emerged from bankruptcy just a couple of years ago. It still has a massive debt load and is staying afloat only by borrowing more and diluting shareholders with rights offerings. Other producers responded to the industry downturn more conservatively and are returning to profitability already, but Pilgrim's recovery strategy just isn't as realistic.
Add these companies to MyWatchlist to stay updated:
• Add Tyson Foods to MyWatchlist.
• Add Sanderson Farms to MyWatchlist.
• Add Pilgrim's Pride to MyWatchlist.
• Add Brasil Foods to MyWatchlist.