PILS PRID : A new bullish trend

06/06/2012 | 12:32pm Opinion : Bullish above 7.7  Target price : 8.6  Stop loss: 7.6

NYSE Food Processing

Pilgrim’s Pride Corporation, based in Colorado, is the second largest chicken producer in the world. Its main operations take place in the US (78% of the total sales) and Mexico (10% of the total sales). Pilgrim’s Pride is a vertically integrated chicken company, involved in the entire production process from farm to plate. Its best competitor is Sanderson Farm, which it is paid 14.63 times its earnings. In December 2008, the company was forced to file for bankruptcy protection because of the record-high corn price, an oversupply of chicken and financial constraints. Since this period, the firm has initiated programs to promote lean manufacturing. It seems to work well because the price rebounded from almost nothing to today’s price.

The company’s size and expertise in the chicken industry has enabled it to acquire a large market share and maintain its brand image, which gives it a competitive advantage. Furthermore, its vertical integration enhances operational efficiency. Even if pork price was weaker, retail demand has strengthened and this trend may continue. Moreover, one year ago, chicken wing price goes up from USD 0.8 to USD 1.8 per pound and corn price is 20% lower. However, intense competition, growing trend of vegetarianism and cut in spending for food in time of crisis could affect the firm’s top line growth. Another threat may be soybean price which remains high but a decrease in the next years is forecast by Bloomberg.

For the first quarter of 2012, Pilgrim’s Pride beat analysts’ estimations by 89% with an EPS of USD 0.18 versus a consensus of USD 0.10. EPS revisions, for this year and the next year, are always increased since January 2012. It is the same case for revenue revisions since May. The company has a low valuation with a PER of 8.02x and a “EV/EBITDA” of 5.96x. The firm has a lot of debt because of its bankruptcy. It is a risk to take because fundamentals are stronger every quarter.

Technically, on every time scale, the trends are bullish. The 20-days moving average has recently crossed again 50-days moving average and is now higher. It seems that the first one is playing the role of support. Lately, the price has touched its resistance at USD 8.55 and its support at USD 7.70, which was a resistance level. This one had been tried several times and is now broken. It is the new support and that is a strong sign of bullish trend.

Due to the graphical analysis, investors can buy the stock close to USD 7.9 with a target price of USD 8.6. In order to avoid important losses, a stop loss will be fixed at USD 7.6.

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