It’s Only Chicken Feed Unless You’re Feeding Chickens: Trouble Ahead for Poultry Producers?

Will consumers be willing to fork out more for chicken dinners this winter? That’s the question on which the fate of the shares of poultry producers like Pilgrim’s Pride (PPC), Tyson Foods (TSN) and Sanderson Farms (SAFM) may rest.

PPC EPS Basic Quarterly Chart

PPC EPS Basic Quarterly data by YCharts

Investors in Pilgrim’s Pride have had a tough ride of late, as the stock chart above demonstrates. So it was all the more pleasant for them to learn last week that the company produced higher-than-expected earnings and revenues during the third quarter of 2012.

PPC Chart

PPC data by YCharts

Pilgrim’s Pride fared poorly last year, when a supply glut combined with high feed prices to erode its margins, but in the most recent quarter the company managed to keep costs flat. The recent announcement was enough to push the stock’s price higher.

PPC Gross Profit Margin TTM Chart

PPC Gross Profit Margin TTM data by YCharts

Clearly, all three major poultry producers have struggled to sustain their profit margins. Moreover, Sanderson Farms, which announced results for its fiscal third quarter at the end of August, reminded investors at that time that that struggle may not be at an end. True, the company swung to a profit from a loss and reported that operating margins were once again positive, but it warned those margins are likely to contract as higher feed costs flow through and hit during what is a period of seasonal weakness, after the end of the summer and early autumn barbecue season.

Sanderson pegged the anticipated downturn to October, meaning that Pilgrim’s Pride’s results for its third quarter may not yet be reflecting the peak prices for feed. It’s also true that Sanderson looks like the strongest of the three major poultry producers, at least in terms of its ability to generate revenue growth, so the odds are that if this is what it believes lies ahead, the same is true for Pilgrim’s Pride and Tyson.

PPC Revenue Quarterly Chart

PPC Revenue Quarterly data by YCharts

A small, family-run poultry company, Zacky Farms LLC, filed for Chapter 11 bankruptcy last month, a reminder of the fate in store for those companies not able to juggle soaring feed costs. Zacky Farms said at the time of the bankruptcy filing that it had been spending $1.8 million a week to feed its turkeys and chicken, an unsustainable amount for the small firm. Back in 2008, an unpleasant combination of sharply higher feed costs and high debt caused Pilgrim’s Pride to file for Chapter 11 bankruptcy protection, so the current state of affairs could well be a cause for concern, especially since the company’s debt load, while below its 2011 peak, has climbed steadily since it emerged from bankruptcy protection.

PPC Long Term Debt  Chart

PPC Long Term Debt data by YCharts

The question becomes to what extent poultry producers will be able to cut production and pass on higher prices to consumers – and whether the results posted by Pilgrim’s Pride prove to be an anomaly.

Suzanne McGee is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.



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