I like the chicken industry and like these companies.
SAFM – chickmag mentions its two new state of art facilities and another breaking ground soon. They have managed their balance sheet well and have less interest expense than TSN or PPC. They have also avoided the low margin sales and price most all of their product based on UB or GA dock market prices. IMO they will do better when the industry does better and worse when the industry does worse.
TSN - most of their expansion appears to be international. While a current drag on margin... international chicken sales should lift future margins. The world needs safe reliable product and TSN is trying to meet that need. More global chicken will be purchased from groceries and less from live / open markets in the future, a trend that benefits TSN... and PPC and SAFM too. Most EPS expansion will likely come from their chicken and prepared foods segments. TSN wants to be a brand biz like HRL not a commodity biz, but they have a ways to go.
PPC – has the most room to improve. They have huge volume and beat TSN on margin last Q. PPC will likely pay down debt over the next few years making them even more attractive. PPC has the benefit of the JBS ownership that can benefit PPC with synergies and access to world markets. PPC has a good presence in Mexico, unfortunately any future expansion outside of N. America will likely be done under JBS and not PPC.
TSN and PPC should be around 15 -17x forward earnings given the strength of the Poultry market, and SAFM is due for a multiple contraction.
I know I always sound like a PPC fan, but to me their valuation is completely out of whack. If you look at forward earnings, they are currently trading at about 7x forward earnings which is just dumb, cause if they hit they're next years earnings projections, or even on the conservative side say $2.00 in earnings in 2014, at a modest 10x earnings they should be trading around $20/share. And realistically, both the next two quarters will beat on earnings projections because this company is extremely well scaled for high margins in a good fresh market, not to mention the fact they are making so much money in Mexico right now that they have been allocating resources (egg sets) down there since the beginning of the year, only driving the US market higher.
Both Tyson and Pilgrims because of their volume can impact the US chicken market up and down based on their strategic decisions. While SAFM may have a great balance sheet, as so many on here like to point out, they do not have the scale, aka volume, that PPC and TSN have. SAFM may be more resilient when the markets turn south, but when things are good they can't keep up with TSN and PPC, and right now things are GREAT in the chicken market. PPC has already sold down long-term debt to the level management stated they wanted to reach so if you back in what they paid down in debt, into earnings last quarter, earnings would have really been around $1.55/share. I think management will continue to pay down some more debt this next quarter as they are expanding their capital expenditures, but given that things should be even better this quarter than last, you can expect earnings to come in atleast around $1.00/share. Look for both earnings and multiple expansion on PPC and TSN.
Are all sales equal?
Price to sales based on trailing 4 Q’s: PPC = .47 … TSN = .3 …. SAFM = .58
Does SAFM deserve its higher valuation based on sales?
Interestingly if TSN’s chicken segment sales are valued at PPC’s .47 ratio … the remainder of their sales would have a price to sales of about .21 …. Is that reasonable?
Chicken segment margins:
15 quarter (14 q for PPC) trailing average return on chicken segment sales: PPC 1.7% … TSN 3.8% … SAFM 2.8%
Return is after admin costs but before interest, other segment income and exp and taxes
Last Q chicken segment margin: PPC 10.9% … TSN 7% .. SAFM 14.1%
SAFM Q ended July. May to July was a better industry period than April to June.
TSN states that 5% to 7% is their normalized margin range for their chicken segment, yet they have hit 5% only one year in the last 7 years ended 2012 and have averaged less than 2% during that time. TSN will likely hit 5+% this year, but shouldn’t they be above normalized range given industry fundamentals?
If PPC, TSN and SAFM have been struggling along with low margins over the last seven years …. Have the smaller producers done any better? What kind of shape are their balance sheets?
Does the industry take the step up and start to consistently return 5 to 7% or do they go back to zero to 2%, or even back to red numbers?
anytime you need cash you have 2 choices: debt or equity. For the most part SAFM has chosen equity. PPC and TSN for the most part have chosen debt. PPC did do a stock offering a couple of times because their balance sheet was so bad and their covenant ratios were so far out of whack that they only had the equity option. Just a company preference: Debt or Equity. From a balance sheet point of view, equity is always the best choice. IF you are a majority stockholder and you don't want to get diluted debt is the best choice.
GM is what matters the most in Poultry. Tons of volume at a penny per pound GM will generate lots of revenue, but the poutly market is so volatile due to supply and demand and feed prices that you need a good spread of margin to protect against major swings in the market place. Tyson is fairly safe because of their high margin retail items, but their costs are also much higher on those value-added items. Both Tyson and Pilgrims have fairly good value-added LOB's, supported by the BK's, Wendy's, McD's, and the school lunch programs that rely on them due to the volume they need. Pilgrims is better at growing/killing/cutting than just about anyone else when you look at industry data(Agristats), but not as efficient in the value added, especially on the pricing side. So when feed is cheap, and fresh markets for chicken are high, Pilgrims margins are going to be some of the best in the industry. When the fresh market begins to decline, Tyson's superior pricing in Retail value added will have incredible margins.