Pilgrim's Pride Deal Expands International Footprint

No-moat

With debt/EBITDA of just 1 at the end of fiscal 2016, we anticipated Pilgrim’s may look to expand its global distribution network but don’t contend the addition of this business stands to bolster the firm’s competitive position. Rather, we surmise even with enhanced scale (adding nearly $2 billion in incremental sales), Pilgrim’s (and the industry as a whole) is still at the mercy of the commodity markets. While we intend to review the assumptions underlying our discounted cash flow model, we don’t foresee a material change to our $30.50 fair value estimate or our long-term assumptions (4% top-line growth and 10% adjusted operating margins, on average, over the next 10 years). Overall, we still expect Pilgrim’s will benefit from strong chicken demand (including its specialty offerings), changed contracting practices linking prices to input costs, and its balanced portfolio of bird sizes.

However, shares traded down at a mid-single-digit percentage on the announcement, and although the industry should remain volatile as input costs remain a critical performance driver (despite procurement and contracting measures that, in our view, have reduced risk relative to the industry’s most recent slide in 2011), if concerns persist, we think investors may be presented with a more favorable entry point. We look to gain further insights on Pilgrim’s strategic focus at its investor day Sept. 20.

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