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.

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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.

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