What happened
Pilgrim's Pride (PPC -0.75%) investors have been clucking in satisfaction this year, as shares of the poultry processor are up 64%, according to data from S&P Global Market Intelligence. Company-specific events have not had much of an impact on the stock this year. Rather, shares have boomed alongside big gains in the industry, as the sector has recovered from a rough 2018 and taken advantage of rising poultry prices and a potential breakthrough in China.
As the chart below shows, Pilgrim's Pride wasn't the only poultry processor to make headway; Tyson Foods (TSN 0.61%) and Sanderson Farms (SAFM) also put up significant gains in the first six months of the year. You can see that the stocks have mostly traveled in tandem.
So what
After poultry stocks fell in 2018, market watchers spied a comeback in 2019 as African swine fever cut the supply of pork to China, raising prices and making chicken more appealing to the world's biggest meat market.
Image source: Getty Images.
Though Chinese imports of U.S. chicken products have been severely limited in recent years, investors were optimistic that the issue could be resolved in trade talks. Reports in mid-April that China could lift a ban on U.S. poultry as part of a larger trade agreement gave Pilgrim's Pride its biggest surge of the year. The stock climbed 8.7% over a two-day span as that news broke.
Pilgrim's Pride's earnings reports were mixed for the year. In its fourth-quarter earnings report, out in February, revenue declined 3.1% to $2.66 billion due to challenging market conditions. However, the company saw solid growth in its prepared foods division, with sales up 15% in the U.S. and 33% in Mexico. The stock fell nearly 5% on the news.
Its first-quarter report in the beginning of May was more favorable, since the company began to recover from weather-related and other challenges that had afflicted it in 2018. Revenue in the first quarter slipped 0.8% to $2.72 billion, and adjusted earnings per share fell from $0.53 to $0.35, but that still matched estimates. CEO Jayson Penn sounded positive on the rest of the year, noting a rise in boneless prices and recent investments that were delivering improving performance. The stock rose 2% following the report and tacked on gains from there.
In late May, the stock gave up some of its gains as feed prices from corn and soybeans surged, pushing the stock down 6% on May 29. Shares slipped again in June due to an inquiry into price fixing between 2008 and 2016 by Pilgrim's Pride and its peers.
Now what
Analysts expect the improving market dynamics to hit the bottom line later this year, with the consensus forecast calling for adjusted EPS of $1.91 in 2019, up 50% from $1.28 last year. Investors will want to keep their eye on the China trade situation, which seems to always be in flux, and the African swine fever outbreak, which continues to be a crisis and just spread to the U.K. and parts of Europe for the first time. It is expected to kill up to 200 million pigs in China alone. If the virus continues its rampage, poultry stocks could move higher, but if a much-sought-after vaccine is found, the rally is likely to ease.
