The market seems set to keep selling off – but is the story really as bad as it seems? The news continues to revolve around coronavirus-induced fear. It’s true that the spread of the virus continues to get bigger; but there are also indications that the worst effects may have already begun tapering off. I noticed a medical report yesterday that concluded not only that the virus had mutated into two different strains, but according to the report, the more deadly of the two – which is the virus that originated in Wuhan, China – also seems to be dropping, while the second, less-deadly strain is the one that is spreading to other parts of the world, including the U.S.
One of the biggest elements that contributed to market volatility over the past year is trade and tariff tensions between the U.S. and China. This was happening at the same time that Swine Flu was ravaging pork farms throughout China, leading many analysts to predict that once the two sides manage to reach a trade deal, protein imports, including pork, chicken and soy from the U.S. would increase to fill the gap. A side effect of coronavirus, however is that that increase in protein demand from China has been muted, which is another reason a lot of Food Products stocks have been following the broad market lower.
Pilgrim’s Pride Corporation (PPC) is an interesting example. PPC focuses on chicken, and while they count China as a market, most of their gains from increasing protein demand in China is that while U.S. companies work to fill the demand for pork and beef to that country, competition for chicken in the U.S., which should eventually work in PPC’s favor. The stock is down big so far this year, more than -35% from a peak a little below $34 per share. That means that based on valuation analysis, the stock offers a big discount. Do the fundamentals back it up? Let’s dive in and find out.
Fundamental and Value Profile
Pilgrim’s Pride Corporation is a retail feed store. It is a producer and seller of chicken with operations in the United States, Mexico and Puerto Rico. It is engaged in the production, processing, marketing and distribution of fresh, frozen and value-added chicken products to retailers, distributors and foodservice operators. It offers a range of products to its customers through national and international distribution channels. Its fresh chicken products consist of refrigerated (non-frozen) whole chickens, whole cut-up chickens and selected chicken parts that are either marinated or non-marinated. Its prepared chicken products include ready-to-cook and individually frozen chicken parts, strips, nuggets and patties, some of which are either breaded or non-breaded and either marinated or non-marinated. As of December 25, 2016, the Company marketed its portfolio of fresh, prepared and value-added chicken products across the United States, Mexico and in approximately 80 other countries. PPC’s current market cap is $5.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 55.5% while revenues improved by 15.3%. Over the last quarter, the picture turned decidedly more negative: earnings dropped by about almost -69% while sales increased almost 10.3%. The company operates with a very narrow margin profile, which isn’t unusual in the Foods industry. Net Income over the last year was 3.99% of Revenues, and narrowed somewhat in the last quarter to about 3.0%.
Free Cash Flow: PPC’s free cash flow is modest, but generally healthy, at about $334 million over the last twelve months. That translates to a Free Cash Flow Yield of 6.39%.
Debt to Equity: PPC has a debt/equity ratio of .99, which is a bit higher than I normally prefer to see, but is also not unusual for food stocks. The company’s balance sheet demonstrates their operating profits are adequate to service their debt, however liquidity is a concern looking ahead. PPC’s balance sheet shows about $280.5 million in cash and liquid assets versus a little more than $2.5 billion in long-term debt.
Dividend: PPC does not pay an annual dividend.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at about $30.66 per share. That means the stock is trading at an impressive discount, with 44% upside from the stock’s current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s upward trend from December 2018 to its peak at the end of last year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s decline from that peak is rapid ands steep, and has seen the stock drop below the 61.8% Fibonacci retracement line. It appears to be trying to find support at around $20.50 per share, with resistance around $22. A drop below $20.50 could see the stock find its next support at around $17, where the 88.6% retracement sits. A break above $22, on the other hand could give the stock good bullish momentum to press to $24, at the 50% retracement line, or possibly to about $26.50 where the 38.2% retracement line sits.
Near-term Keys: The stock’s fundamentals are generally pretty solid, and the truth is that at its current price, PPC offers a discount that is better than a lot of other Food Products stocks right now. That could make for a good long-term opportunity, if you’re willing to be patient and wait for the headwinds analysts expect to eventually come into play to materialize. If you prefer to work with short-term trades, a break below $20.50 could offer a good signal to consider shorting the stock or working with put options, with an eye on $17 as a useful profit target. A push above $22 could offer an aggressive, but interesting opportunity to buy the stock or work with call options, with $24 to $26 providing a good range to use to take profits on a bullish trade.