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Pilgrim's Pride (PPC) Up 3.9% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Pilgrim's Pride (PPC - Free Report) . Shares have added about 3.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Pilgrim's Pride due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Pilgrim's Pride Posts Dismal Q3 Earnings & Sales

Pilgrim's Pride posted dismal third-quarter 2018 results, as the top and the bottom line declined year over year and fell short of the Zacks Consensus Estimate. In fact, this marked the company’s third straight quarter of bottom-line miss. Results were hurt by a tough Mexican market, difficult commodity market in the United States and high feed costs in Europe.

Q3 in Detail

Quarterly adjusted earnings came in at 21 cents per share, significantly lower than the Zacks Consensus Estimate of 55 cents. Also, the bottom line plunged substantially from 98 cents reported in the year-ago quarter. This could be attributable to lower revenues, higher interest expenses and dismal margins.

In the reported quarter, Pilgrim's Pride generated net sales of $2,697.6 million, down 3.4% year over year. Also, the top line missed the Zacks Consensus Estimate of $2,720 million. Results were hurt by sluggish environment in Mexico and tough commodity chicken pricing in the United States.

Revenues from U.S. operations came in at $1,864.2 million, down 3.8% year over year, owing to one of the toughest pricing scenario in commodity chicken. However, the region gained some respite from a comparatively better performance of non-commodity chicken, which includes organic and small birds.

Further, Mexican operations generated revenues of $306.7 million in the reported quarter, down 10.1% year over year. This could be accountable to an extremely difficult market environment in the country where pricing was impacted by excess supply stemming from strong growing conditions. Nevertheless, the company stated that pricing has already started recovering in the region. Further, Prepared Foods continues to perform strongly, under both premium Pilgrim’s and Del Dia categories. This is likely to elevate the company’s Mexican portfolio toward including more unique and superior-value products with higher margins.

The top-line results from the European operations also improved 2.4% year over year to $526.7 million. The region is benefitting from better-than-expected integration of acquired operations as well as focus on diversification into new markets.

Cost of sales in the reported quarter flared up 9.2% year over year to $2,527.9 million. Lower sales and increased cost of sales caused the gross profit to slump 64.5% to $169.7 million. Also, gross margin went down 10.8 percentage points to 6.3%.

Selling, general and administrative expenses fell 17.7% year over year to $84.1 million. Further, adjusted EBITDA came in at $156 million, down 66.3% year over year. Adjusted EBITDA margin of 5.8% for the reported quarter depicted a fall of 10.8 percentage points.

Other Financial Details  

Pilgrim's Pride exited the quarter with cash and cash equivalents of approximately $401.3 million, long-term debt (net of current portion) of $2,302.2 million and total shareholders’ equity of $2,067.5 million. Further, the company generated $425.3 million as cash from operating activities during the first three quarters of 2018.

In a separate press release, Pilgrim's Pride revealed that management authorized a new $200 million buyback program extending over the next 12 months.

Outlook

The company witnessed mixed operating conditions in the United States, wherein commodity segment was hurt by counter seasonal and soft pricing. However, the non-commodity segment provided cushion. Further, the company is making continuous efforts to place the region in a safe situation amid all market conditions. To this end, Pilgrim’s Pride is likely to gain from its past investments, diversification and differentiation, recent buyouts, and operational enhancements.

While Mexico remained sluggish in the third quarter, management is optimistic about Mexican operations, driven by recovery in pricing, yielding investments and focus on diversification. The company expects the region to sustain its solid full-year margin trends in the forthcoming periods. In Europe, the company’s integration process is moving better than expected and the company is ahead of its synergy target of $50 million for the next two years. While the company witnessed increased feed input costs in the quarter, focus on cost optimization, synergy generation, enrichment of customers’ experience and innovations fueled the European region’s performance.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -55% due to these changes.

VGM Scores

At this time, Pilgrim's Pride has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Pilgrim's Pride has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.




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