July 21, 2011


Pilgrim's Pride relies on Brazilian ally



In order to remain competitive, Pilgrim's Pride Corp. (PPC) is leaning on a major Brazilian ally in the war of attrition between US chicken producers.


By many measures, Pilgrim's Pride in Greeley, Colo., is the also-ran among its big chicken-processing competitors. It is the nation's second-biggest producer, but has not been able to reinvest in itself as well as leader Tyson Foods Inc. (TSN). And Pilgrim's, which was recently bankrupt, does not have Sanderson Farms Inc.'s (SAFM) record of providing shareholder value.


But Pilgrim's Pride, and its beleaguered US$5 stock, has one feature to cushion its shareholders' shaky-thin equity: majority ownership by the giant Brazilian meat producer JBS SA (JBSAY, JBSS3.BR).


The two companies' relationship and its benefit to Pilgrim's stockholders are coming in handy.


In late June, JBS gave Pilgrim's a US$50 million loan, with agreements for as much as US$50 million more, so Pilgrim's could avoid defaulting on other debts. When Pilgrim's emerged from bankruptcy two years ago, JBS built a 67% stake at about US$5 a share. The new loan is tailored to the settlement, which restricts how JBS can acquire more shares.


"We were happy about making the acquisition we made," said Jeremiah O'Callaghan, spokesman for JBS. "We are very secure the industry will recover long before JBS would need to make any other gestures" to Pilgrim's.


The loan ensures its 42,000 employees, who support operations in 14 states, can keep turning out chickens for the rest of the year even as the whole operation loses money on virtually every bird it sells.


That means JBS is essentially the barrier between Pilgrim's Pride and the specter of another bankruptcy.


"This stock is not going to zero mainly because of the financial backing they have from JBS," said an analyst.


This partnership does not necessarily mean Pilgrim's stock is set to rise anytime soon. Given Pilgrim's mountain of debt and its bruised earnings track record, the stock is likely to languish until the "chicken cycle" turns.


"I think it is going to be a while before the industry gets to profitability," said another analyst. "Breast meat prices are currently at record lows for this time of year."


"We believe the company will not have any difficulty in the next 18 months," JBS's Callahan said. "And by then, we believe the chicken sector would have recovered."


JBS, for its part, is betting that Pilgrim's will come through the cycle in a bigger, stronger position. If it does, Pilgrim's could boost JBS profits by adding chicken to JBS's massive global supply chains. "We see much growth in emerging markets, where there is not a lot of growth in production," Callahan said. China, for example, is struggling under a ballooning urban population that has increasingly out-eaten the nation's own domestic pork supply.


As it stands, Pilgrim's is one of the few companies that can fill orders for big restaurant and food-service companies, like Chick-Fil-A Inc., which has 1,500 restaurants nationwide, and giant distributor Sysco Corp. (SYY). In the wake of the 2008 bankruptcy, the company also has new management whose pay is closely tied to Pilgrim's performance as compared to competitors.


But the company's debt piles could get in the way, especially if the losing side of the chicken cycle stretches far into next year. Pilgrim's has US$1.4 billion in long-term borrowings and a higher debt-to-equity ratio than its two biggest competitors.

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