Pilgrim’s Pride’s Attractive Valuation and Cost Savings Make It a Worthy Investment

Pilgrim’s Pride is flying high this year due to cost savings and a strong distribution network, and the trend looks set to continue.

Apr 28, 2014 at 5:23PM

Pilgrim's Pride (NASDAQ:PPC) has been in great form this year. The chicken producer's shares have gained a hearty 35% in 2014, driven by impressive fourth-quarter results that were released in February. Looking ahead, there's a good chance that Pilgrim's strong performance will continue, even though it faces competition from the likes of Tyson Foods (NYSE:TSN) and Sanderson Farms (NASDAQ:SAFM)

Focus on savings
Pilgrim's Pride is making some really good moves. The company reported an EBITDA of $196.5 million in the fourth quarter, a massive increase of $132 million from the same period last year. The improvement in EBITDA was a result of various cost-saving initiatives, such as closing underperforming plants and even reducing free Gatorade for workers.

The plan for 2014 looks even more aggressive, because Pilgrim's is planning to save $220 million through its cost-reduction moves this year.

A strong network
Pilgrim's Pride has notable customers in both food service and retail. It supplies its products to the likes of ConAgra, Sysco, Burger King, Yum! Brands, etc. Pilgrim's Pride has entered into fixed long-term price contracts with these players in food service, which will help the company maximize its sales, and eventually deliver more value to shareholders. In addition, Pilgrim's tie-ups with Wal-Mart, Costco, Kroger, Publix, Safeway, Supervalu, and Hy-Vee in the retail segment further strengthens its distribution levels. 

Moreover, Pilgrim's Pride has worked with key regional retailers in 2013 and developed a brand of antibiotic-free, or ABF, chicken. Pilgrim's moved fast in this market after noticing high demand for ABF chicken, and now it is among the biggest producers of this chicken variety. ABF chicken is in strong demand, and it has a lot of room to grow in the future because it accounts for just 9% of the $10 billion fresh chicken market, according to IRI/FreshLook. 

Don't ignore Tyson
There could be tough competition in this segment, with Tyson already present in the ABF chicken market. Tyson is a bigger and more-diversified player as compared to Pilgrim's, and it has contracts with 4,300 poultry farmers. Access to such a big number of farmers could give Tyson a solid advantage in ABF chicken going forward as far as costs are concerned.

Tyson is encouraging its farmers to adopt cost-cutting moves such as using LED lights to grow the chicken instead of traditional lighting. Reportedly, this move is enabling chickens to gain an extra pound, while also resulting in tremendous cost savings for farmers due to the efficient nature of LED lights. So, Tyson might trigger a price war if it is able to get more chicken for less from its farmers.

Relative valuation
Pilgrim's Pride trades at a trailing P/E ratio of just 10.5. In comparison, Tyson is way more expensive at 18 times earnings. Also, Tyson's earnings are expected to grow at a slower rate of 7% for the next five years, while Pilgrim's is expected to grow at a faster rate of 9%.  

Considering that Tyson is a more-diversified player, let's take a look at how Pilgrim's stacks up against a more direct competitor such as Sanderson Farms.

Pilgrim's Pride is cheaper than Sanderson on both the trailing and forward P/E basis. Sanderson's trailing P/E is 11.5, while its forward P/E of 15.8 is once again more than Pilgrim's 14.5. In addition, Pilgrim's is a more profitable company, with a net profit margin of 6.53%. Comparatively, Sanderson lags behind with a net profit margin of 6.23%. Also, Sanderson's return on equity of 27% is also way behind Pilgrim's 46%. So, all in all, Pilgrim's Pride's valuation is also better than its peers.

Bottom line
Pilgrim's Pride has done significantly well this year, and the trend looks set to continue going forward. The company's focus on enhancing operational efficiency shows in its superior earnings growth projection. Considering that it distributes its product to key retailers across the U.S., it could be a good long-term bet.

Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Prabhat Sandheliya has no position in any stocks mentioned. The Motley Fool owns shares of Sanderson Farms. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers