Pilgrim's Pride Worries Over Commodity Chicken & High Costs
Pilgrim's Pride Corporation PPC is groveling over a tough commodity chicken market and rising costs. These headwinds lingered in fourth-quarter 2018 and may pose threats to the Zacks Rank #4 (Sell) company in the near term. On that note, let’s take a closer look at the factors hurting Pilgrim’s Pride, and see if any growth efforts are in place.
Roadblocks to Growth
Pilgrim’s Pride has been witnessing tough commodity chicken market conditions in the United States for a while. This along with adverse weather conditions across some locations dented revenues from the company’s U.S. operations in the fourth quarter of 2018.
Moreover, management is concerned about reduced demand of commodity chicken, considering high availability of other meat-based protein. The United States Department of Agriculture (USDA) predicts that total production growth of the chicken industry in 2019 will be lower than the 2018 levels, which remains a matter of concern.
Additionally, we note that during the fourth quarter, the company witnessed a decline in revenues from Mexican and European operations. The European region was sluggish due to higher feed inputs stemming from drought conditions. Persistence of such regional headwinds will mar the top line.
Another major roadblock to the company’s performance stems from expanding cost of sales. Rising costs, if unchecked, can continue to hurt profits in the upcoming quarters. In fact, during the fourth quarter of 2018, cost of sales rose 2.6% year over year. Moreover, lower sales and higher cost of sales caused gross profit to slump 57.3%, while gross margin fell 5.3 percentage points to 4.2%. Other players from the meat space, such as Tyson Foods TSN, are also under pressure due to rising costs.
Coming back to Pilgrim’s Pride, shares of the company are down 7.2% in a year, against the industry’s rise of 11.4%.
Nonetheless, management is relying on growth endeavors such as innovation, augmenting marketing support for brands and improving supply-chain operations through enhanced technology implementation. The company’s Prepared Foods business is performing well on the back of strong brands. We expect such upsides to aid the company in the forthcoming periods.
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