Pilgrim's Pride Deal Expands International Footprint
Even with enhanced scale, the company (and the industry as a whole) is still at the mercy of the commodity markets.
No-moat Pilgrims Pride (PPC) is building out its international footprint with the $1.3 billion cash purchase of Moy Park, the second largest U.K. poultry producer, from its parent JBS (which owns nearly 80% of Pilgrim’s shares). The deal values the European processor at 0.7 times trailing 12 month sales and 7.1 times EBITDA, which strikes us as reasonable. Management targets around $50 million in synergies over the next two years (a mid-single-digit percentage of pro forma EBITDA), stemming leverage of marketing, sales, and infrastructure and the integration of IT and support services.
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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Erin Lash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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