Pilgrim’s Pride: A Free Cash Flow Machine (NASDAQ:PPC)

Pilgrim’s Pride (NASDAQ: PPC) has seen good returns since emerging from bankruptcy in 2009, but has been stuck in a sideways price range for nearly a decade. It was only in the last 3 months able to break out of this range and has set expectations for even higher returns for the foreseeable future.

I see more upside with the stock, but the risks in the industry are far too high to make a full investment in the company.

Currently, my strategy is to take a minor position in the company and pyramid up as the price action confirms my thesis instead of immediately taking a full position in the company.

My write-up below will go into more detail about why I use this plan.

Four positive factors driving my “Buy” sentiment.

Pilgrim’s Pride Corporation is a leading global supplier of high quality food products, primarily focused on chicken and pork. Founded in 1946, the company has grown to become one of the largest chicken producers in the United States and a major player in the global protein market.

The company operates a vertically integrated business model, controlling the entire production process from reproduction and processing to distribution. With operations in the United States, Mexico, Puerto Rico and Europe, PPC serves various customer segments including retail, foodservice and international markets.

Factor #1 Protein demand will help Pilgrim’s Pride

The global protein market is experiencing strong growth driven by population growth, rising incomes in developing countries, and changing food preferences.

In 2024, the poultry market revenue will reach USD 30.2 billion. The market is expected to grow by 4.29% annually (CAGR 2024-2029). Pork market revenue will reach USD 17.71 billion in 2024. The market is expected to grow at a CAGR of 5.41% annually (2024-2029). Note that these figures are for the US only.

Worldwide, Income in pork market to reach $320 billion in 2024. The market is expected to grow annually to 6.09% (CAGR 2024-2029). Poultry income market to reach USD 312.7 billion in 2024. The market is expected to grow annually to 6.98% (CAGR 2024-2029).

As a major player in the protein industry, Pilgrim’s Pride Company is well positioned to benefit from this long-term trend.

Factor #2 Pilgrim’s Pride has become a free cash flow machine

Pilgrim’s Pride Company posted a significant revenue growth of 18.21% in 2022, rising from $14.78 billion in 2021 to $17.47 billion. In 2023, revenue fell slightly by 0.61% to $17.36 billion. Factors such as the normalization of the recovery due to COVID-19 and acquisitions may explain the movement in revenues. However, despite the small decline in 2023, the overall revenue trend remains positive, with a compound annual growth rate of approximately 8.4% over the three years.

The most recent quarter (Q2 2024) saw revenue of $4.56 billion, an increase of 5.83% compared to last year’s quarter. The positive growth trend in recent quarters suggests that the company may return to a growth trajectory in 2024.

But what is more impressive to me is the cost improvement. The company reported improvements in operational excellence and cost management across its global operations.

Margins have improved every quarter and even with substantial capital, free cash flow levels are at their highest levels at $1.1 billion and FCF margin at 6.2%.

Strong cash flows have bolstered its balance sheet, and for a company with a history of bankruptcy, that’s a great position to be in.

The below-percentile ranking also shows its record is near its best in a decade (about more than 80% since then, the debt-to-earnings/equity/equity ratio has been higher than it is now.

Factor #3 Quantitatively, low beta is attractive and provides diversification

When looking for growth, it’s hard to stay away from high-beta names because most of the returns can come from high-beta stocks. But it is well known that it is a double-edged sword and can be a factor in deep discounts during market corrections.

But Pilgrim’s growth and share price behavior suggest it currently has the best of both worlds. Its The 24-month beta is currently 0.5 meaning they are likely to experience smaller price fluctuations compared to high-beta stocks or the general market.

Stocks like Pilgrim’s Pride therefore play a very important role in diversifying the portfolio, and I certainly consider this factor to be a big positive driving my “buy” sentiment.

Factor #4 Pilgrim’s Pride is attractively rated

In the consumer staples sector, Pilgrim Pride’s strong revenue, profitability and cash flows make it attractively valued. As Seeking Alpha’s valuation page demonstrates, valuations trade at a large discount to the sector median.

For a much better comparison, we can zoom in on the industry itself. Among the 53 components of the “Packaged and meat” industry, Pilgrim ranks 5th in PE, 4th in EV/EBITDA and 6th in price to cash flows!

Will these stellar gains continue into the future?

For fiscal 2024, consensus EPS estimates are $4.5 and revenue $18 billion. EPS is 40% more than trailing twelve months diluted EPS which is forward PE can contract below 10x. This means that even with its share price up over 60% over the past year, it is still undervalued and still 50% INCREASE from here it cannot be excluded.

The risks of Pilgrim Pride cannot be understated

Normally, a company with a strong market outlook, earnings momentum, strong cash flow and undervaluation deserves a “Strong Buy” rating in my book. In this case, however, the risks and what I’ve learned from this company’s history made me cautious and resulted in a lower “Buy” rating.

The protein industry, especially poultry, is known for this cyclical character and susceptibility to various external factors.

One of the most notable declines in Pilgrim’s Pride stock occurred during the financial crisis of 2008. The company filed for Chapter 11 bankruptcy protection in December 2008 due to a combination of high feed costs, falling prices on chickens and excessive levels of debt.

Rising prices for corn and soybean meal, essential components of chicken feed, have severely squeezed profit margins. In addition, the global financial crisis has led to reduced consumer spending, further weakening the demand for chicken products. The company emerged from bankruptcy in 2009 after restructuring its debt and receiving an investment from JBS SA, a Brazilian food company.

The story of commodity price volatility repeated itself again in 2012. In 2012, the severe drought in the US sent corn prices soaring to record highs, negatively impacting Pilgrim’s Pride’s margins and share price.

In addition, the poultry industry is susceptible to disease outbreaks, such as avian influenza (bird flu), which can lead to significant operational disruptions, including culling, temporary plant closures and trade restrictions.

For example, during the 2015 bird flu outbreak, Pilgrim’s Pride faced challenges due to export bans in several countries, which led to oversupply in the domestic market and depressed chicken prices, hurting the company.

Each of these events caused a severe crisis in its share price, and investors had to endure brutal discounts.

Action

As I stated at the beginning of my write-up, even with the company’s strong fundamentals, I am bullish enough to only take a minor position in the stock and slowly grow my position over the next few quarters.

The strategy helps protect against “Grey Swan” risks (Grey Swan is a known and possible event that is assumed not to occur. It is a less popular cousin and an extension of the Black Swan concept) and if there are indications of history. repeating myself, I will aim to be the first out the door.