Pilgrim's Pride Corporation PPC continues to lose investors’ faith, thanks to headwinds surrounding rising cost of sales as well as challenges in the commodity chicken market. This renowned company, engaged in the manufacturing and selling of fresh, frozen and value-added chicken products, saw its shares decline around 8.5% in the past three months compared with the industry’s fall of 6.3%.
Nevertheless, the company’s business is progressing well in Europe, which is boosting revenues. Further, the company’s strategic initiatives to expand customer base and augment supply chain efficiency are impressive. That said, let’s take a closer look at the factors impacting the company’s performance and discuss the probabilities of a turnaround.
Strong European Business
Pilgrim's Pride’s European business is expanding on the back of gains from acquired operations as well as focus on diversification into new markets. Notably, revenues from this category improved 2.4%, 12.5% and 18.6% year on year in the trailing three quarters.
The region is also gaining from a strong business model, robust customer relationships as well as better synergy capture. Moreover, efforts such as capacity optimization and expansion are likely to continue boosting revenues from the region in the forthcoming periods.
Other Growth Oriented Efforts
Pilgrim's Pride’s customer centric approach has enabled it to come up with unique offerings that provide competitive advantages. In fact, the company’s focus on key customers is a pathway for refining portfolio and creating competitive advantages over peers. Progressing on such lines, the company is expanding in the fresh food offerings space.
In fact, the launch of fresh chicken products under the premium Pilgrim's brand is receiving favorable consumer response. Further, the company is on track to expand gluten-free products. Further, the company is on track with innovations in the alternative protein space, such as plant-based protein, which is slowly gaining popularity in the U.K.
Apart from this, the company is steadily augmenting marketing support of brands as they expand and enter new regions. Additionally, the company resorts to frequent supply chain improvements to enhance efficiency and reduce costs. In this respect, the company is progressing with the development of automation technology for processing plants.
Introduction of such advanced technology is expected to increase efficiency and offset labor availability issues. Along with this, the company’s dedicated efforts, including zero base budgeting and positive impacts from acquisitions are expected to create synergies of $50 million in the next two years.
Can Strategies Pare Hurdles?
During the third quarter of 2018, Pilgrim’s Pride witnessed challenging pricing environment for commodity chicken in the United States. Moreover, management is concerned regarding the reduced demand of commodity chicken, considering the higher availability of other meat-based protein.
To top this, expanding cost of sales is a significant hurdle for the company. Rising costs, if unchecked, can continue to hurt profits in the upcoming quarters. In fact, during the third quarter of 2018, cost of sales rose 9.2% year over year. Prior to this, in the second quarter, cost of sales increased 12.5%. We note that rising costs of operations have also eclipsed the performance of companies like Campbell Soup CPB, General Mills GIS and TreeHouse Foods THS.
Despite such headwinds, we cannot ignore the company’s efforts to augment portfolio strength and enhance operational efficiency. In fact, we expect that its endeavors to enhance savings will help combat rising costs. Moreover, the company’s strong European business is likely to keep boosting revenues. We expect that such upsides will revive this Zacks Rank #3 (Hold) company’s performance in the forthcoming periods.
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