Food companies in the United States have plenty of reasons to be jittery, thanks to the persistent rise in commodity costs. The situation has worsened due to tariff-related headwinds induced by the trade war with China. Apart from this, new products and firms entering the space have raised the bar of competition.
While few food companies have been managing to stay afloat on the back of savings and other development efforts, others like Pilgrim's Pride Corporation (PPC - Free Report) have been hit hard. This renowned company, engaged in the manufacturing and selling of fresh, frozen as well as value-added chicken products, saw its shares tank around 25% in the past six months compared with the industry’s decline of 4.8%. That said, let’s take a closer look at the factors plaguing this Zacks Rank #5 (Strong Sell) company’s performance and see if there are any possibilities of a revival.
Rising Commodity Costs Make Matters Grim
Rising cost of sales is a significant hurdle for Pilgrim’s Pride. This has been caused by commodity costs inflation, primarily related to corn and soybeans. Corn prices have been rising, owing to higher export demand and lower expected corn production in Argentina. Further, soybean prices have shot up since January on account of crop losses in Argentina. Moreover, the potential trade war with China is causing excess volatility in soybean prices, as the country accounts for a significant chunk of soybean export demand.
Rising costs, if unchecked, can continue to hurt profits in the upcoming quarters. In fact, during second-quarter 2018, cost of sales rose 12.5% year over year to $2,562.5 million. As a result, gross profit declined 42%, while gross margin deteriorated 760 basis points (bps) year over year to 9.7%. Also, this hurt the company’s bottom-line performance in the reported period, which fell 42% from the year-ago quarter’s tally. Going ahead, such volatile conditions surrounding the commodity market continue to pose significant threats to the company’s profitability. Other food companies whose performance have also been eclipsed by high costs are Campbell Soup (CPB - Free Report) , General Mills (GIS - Free Report) and TreeHouse Foods (THS - Free Report) .
Risks Related to Substitute Meat Market
The medical community is promoting plant-based protein products over the meat-based ones, on account of health risks. The rising demand for plant-based protein is likely to dampen revenues and profitability of meat-product producers like Pilgrim’s Pride. Further, the United States Department of Agriculture (USDA) predicts that growth of the chicken industry in 2018 will be slightly lower than the last year, thanks to increased regulatory concerns marring trade as well as existence of substitute products.
Although the company’s focus on key customers and a sturdy brand portfolio have been driving top-line performance, the aforementioned headwinds have blurred the bottom-line picture. We note that management is resorting to aggressive efforts to revamp supply chain to enhance efficiency and reduce costs. However, such initiatives are yet to bear favorable impacts. That said, until matters take a turn, we prefer to remain on the sidelines.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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