2023-12-05 08:30:00 ET
Summary
- Pilgrim's Pride Corporation beat top and bottom-line estimates in Q3, driven by improving financials in the US market.
- The stock has seen significant appreciation in recent months, leading to a higher valuation, and investors should be cautious.
- PPC's long-term technical chart suggests that shares may remain below a certain price point for some time, but there is still potential for gains up to that point.
We wrote about Pilgrim's Pride Corporation ( PPC ) back in May of this year when we stated that the chicken distributor was not cheap enough to justify long exposure. Although shares of PPC have returned over 15% over the past six months (beating the S&P500's return of approximately 9% over the same period), we are maintaining our long-term 'hold' rating for the following reasons.
Although PPC beat top & bottom-line estimates in its recent third quarter (Revenues of $4.36 billion on GAAP earnings of $0.51 per share), both sales & particularly net earnings came in well down compared to the same period of 12 months prior as we see below.
Q3 Momentum
In saying this, what essentially drives PPC stock is the performance of its bigger US business and here we have seen PPC make inroads concerning its improving US financials on the income statement.
Adjusted EBITDA of just over $174 million in the US in Q3 meant that profitability continues to rise in Pilgrim's largest market. Suffice it to say, that Pilgrim's recent performance (aided by operational improvements in UK & Europe as well as better fundamentals in Mexico) has led to positive EPS revisions in recent months, which in large part is responsible for shares continuing to trade higher. The fourth quarter EPS target of $0.42 per share for example has risen by 27%+ over the past three months & by 42% over the past 30 days alone. The CFO on the recent Q3 earnings call explained the reasoning behind the encouraging sequential US growth trends below.
Over the last three quarters, we've grown U.S. profitability sequentially despite volatile market conditions. Our key customer partnerships helped drive strength in our case-ready business during Q3 and we see further momentum in retail volumes continuing. Also, the U.S. Small Bird and Prepared Foods businesses continued their strong 2023 performance during the third quarter. Our Big Bird business realized quarter-over-quarter improvements through a combination of operational excellence programs and enhanced market fundamentals.
Valuation Remains On the High Side
However, given the share-price appreciation we have seen in recent months, Pilgrim's valuation has also changed, and here is where investors need to be careful. Stamping an accurate valuation on a stock can be tricky even in the best of times which is why we like to compare present multiple & ratios with long-term averages. Therefore, by comparing the price of Pilgrim's sales, assets, earnings & cash flow with historic averages, we can gauge whether we believe the stock is cheap or expensive at present. Furthermore, the balance sheet and specifically the company's debt load is a crucial component of one's due diligence when attempting to value a company. Moreover, Pilgrim's return on capital as well as top-line sales growth all tie into a stock's valuation and its forward-looking potential. Therefore, on this note, here is how Pilgrim's present trailing multiples correspond to their equivalent 5-year averages.
Metric | Trailing | 5-Year Average |
Price To Earnings | 190.53 | - |
Price To Sales | 0.36 | 0.45 |
Price To Book | 1.97 | 2.32 |
Price To Cash-Flow | 21.74 | 11.23 |
Return On Capital | 1.1% | 12.48% |
Top-line Sales Growth | -2.41% | 10.2% |
Concerning the balance sheet, Pilgrim's long-term debt has increased from $2.29 billion at the end of fiscal 2018 to a current $3.69 billion at the end of Q3 this year. Although assets have also increased, Pilgrim's current 'total liabilities' to equity ratio has increased from 1.94 to 2.22. This trend impacts interest expense on the income statement, which once more increased in Q3, coming in at almost $177 million for the quarter.
The trends we have discussed above tie directly in with what we are seeing in Pilgrim's long-term technical chart. As we see below, Pilgrim's long-term divergence in its RSI momentum indicator plus its inability to take out overhead resistance above $32 a share convincingly leads us to believe that shares will remain under this price point for some time to come. Could shares rally up to test overhead resistance once more over the near term? Of course, but the real question is based on the valuation exercise above in that would PPC at that point have the needed firepower to essentially break through? Remember, the longer trendlines remain intact, the more noteworthy they become. There is still almost a nominal 28 to 30% potential gain if indeed PPC shares can continue their ascent up to long-term resistance but investors have to gauge whether the risk is worth the reward here as nobody knows 'how long' it would take this potential move to materialize.
Conclusion
To sum up, Pilgrim's Pride reported beats in both its top and bottom-line numbers as momentum was visible in the US, UK & Europe & Mexican markets. Given recent trends, fiscal 2024 is setting itself up to be a strong year but growing interest expense which is affecting robust cash-flow generation means we continue to rate PPC a 'Hold'. We look forward to continued coverage.
For further details see:
Pilgrim's Pride: Gaining Momentum But Heavy Overhead Resistance Ahead