Company OverviewPilgrim’s Pride Corporation is one of the largest chicken producing and packing companies in the world. Founded in 1946, as a retail-feed store, it was incorporated in 1968 in Texas and again 1986 in tax-friendly Delaware, restructuring its business practices over the years to become the chicken producer that it is today. During the financial collapse that began in 2007, the company slipped in to bankruptcy and subsequently exited a year later with the sale of a majority stake to Brazilian meat giant JBS SA. Bankruptcy proved a boon for the troubled company and it has thrived since 2008, becoming a highly profitable and fundamentally sound organization. Most recently Pilgrim’s Pride acquired Tyson Foods’ Mexican poultry business and the company continues to seek M&A opportunities.

Investment Thesis

The Consumer Goods sector and specifically the Diversified Food industry has experienced lagging performance in recent months compared to other sectors; however, the fundamentals of the sector remain strong. Pilgrim’s Pride itself is, fundamentally speaking, undervalued and the long term potential for this security is very favorable. PPC’s equity is undervalued based on several valuation models and a target price of $25.86 has been set.

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Price

Rating HoldCurrent Price $21.06

Target Price $25.86

Date 9/14/2015

Market Data

52-week High $38.65

52-Week Low $19.26

Average Volume 1,616,310

Market Cap 5.75B

Shares Outstanding 259.68M

EPS $3.34

Trailing P/E Ratio 6.30

Beta 1.04

ROA (%) 28.53%

ROE (%) 59.20%

Street Research Street Research

Analyst

W. Tyler Streeter-- tystreets@comcast.net

Pilgrim’s Pride Corporation (NASDAQ: PPC): Food Production and Packaging

Economic Overview

Real GDP

2014: 2.40% 2015 Estimate: 2.98%At 2.40%i, United States GDP growth in 2014 was at its highest level since 2006. Nearly 8 years since the beginning of the financial crisis, GDP appears to be reaching normal levels of growth. The estimated GDP growth for 2015 is 2.98%ii. This value reflects the average estimates of the World Bank, IMF and the United Nations. Despite strong economic estimates, GDP in Q1 2015 fell below forecasted growth rates, contracting by -0.2%. The underperformance was attributed to a myriad of factors including: Crippling weather conditions brought on by the most recent winter, a stronger US dollar decreasing demand for US exports, unrest at west coast ports, and tepid consumer spending, among others. Despite the disappointing Q1 performance, Q2 GDP grew at an annualized rate of 2.3%. As the forecasted GDP for Q2 was 2.6%, Q2 fell below expectations as well. However, this is a vast improvement over Q1 performance. Despite stronger economic conditions, economic stability will not be considered stable until annual GDP growth reaches 3.00%.

Federal Reserve

Speculation as to the exact date on which the Federal Reserve will begin raising interest rates has abounded since rates were reduced in 2008. The Federal Reserve has maintained the expectation of a rate increase later this year and the majority of economists were, until recently, expecting the first rate hike to occur in September of 2015. Although Federal Reserve Chair Janet Yellen firmly maintains the expectation of a late 2015 rate hikeiii, recent economic upheaval in foreign markets has cast doubt on the current timetable. Reasons to hold off on raising interest rates have continued to stack up over the past 6 months: The ever-present possibility of a Greek default, extreme volatility in Chinese markets (most recently and alarmingly a devaluation of its currency), and GDP stagnation across Europe for Q2 2015 have led economists, analysts and amateur investors alike to infer that the first rate hike will be delayed.

Consumer Sentiment

According to the Index of Consumer Sentimentiv survey conducted by the University of Michigan, consumer’s confidence in the economy has increased dramatically over the past year. Growing by 16.48% since June of last year, consumer sentiment is the highest it has been since 2007. Confidence in the economy is essential for its continued growth and expansion going forward.

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INDEX OF CONSUMER SENTIMENT

Industry Outlook

Chicken Demandv

Per-Capita consumption of chicken has increased markedly between 2000 and 2014, rising by 9.43% over that timeframe. It is, and is projected to remain, the largest and fasted growing portion of the United States meat market. Ever since 1992 when it surpassed beef and became the United States’ most consumed meat, chicken consumption has been rising exponentially. Beef has fallen out of favor with U.S. consumers, almost as fast as chicken has grown in popularity, due to its high cost and fat content compared to chicken.vi In fact, since 2000 the gulf between beef and chicken consumption has grown even larger, with beef consumption declining by almost 20% and chicken consumption increasing by nearly 10%. Chicken consumption is predicted to increase 5.79% in 2015 by the USDA.

Per Capita Consumption MeatYear Beef Pork Chicken

2000-2014 -19.70% -8.66% 9.43%2014-2015 Proj. -0.18% 7.76% 5.79%

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Beef Pork

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H5 Avian Fluvii

H5N2, known officially as Avian Influenza and colloquially as “Bird Flu,” was detected in two British Columbian poultry farms in early December 2014. Despite rigorous culling protocols and

a strict import ban imposed on British Columbian chicken, eggs, egg products and animal byproducts by the United States, the highly contagious H5N2 strain of Avian Influenza has spread across the northern Mid-Western states. The estimates vary, but as of now over 40 million birds have either died from the virus itself, or been culled in an attempt to prevent further transmission. The states primarily affected are Iowa, Minnesota and Wisconsin, with affected birds numbering roughly 30 million, 9 million, and 1.5 million respectively.

This drastic cut in supply has been devastating for the farmers responsible for the raising of commercial chickens, also known as broilers, and will be a problem for top chicken producing companies who contract with the affected farms. A more immediate problem for large chicken companies however have been the numerous import bans instituted by the top 10 consumers of United States chicken. viii These bans have effectively restricted United States chicken producers to domestic and limited international markets, resulting in lower than expected revenue across the industry.

Feed Pricesix

Feed prices, specifically of corn, have a tremendous impact on the price of poultry and poultry products. As the cost of feed directly affects the cost to raise each individual chicken, an increase or decrease in the price of corn has a dramatic effect on the bottom line of top poultry producers. An interesting relationship exists between chicken producer stock price and corn prices as can be seen below at the top of the right column on this page.x

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PPC Ending PriceCorn Price By the Bushel

It appears that the perception of financial hardship imposed on chicken producers by corn prices has a profound effect on the price of the company’s stock. It logically follows that chicken companies must keep the price of the commodity they sell on par with market price regardless of the increases in variable

costs that they may incur. This effect is mitigated to a certain extent if the company in question is diversified, with other business segments besides poultry production.

The price of corn is expected to stay low for the foreseeable future, according to the USDA,xi but given the cyclical nature of commodities markets and their dependence on weather, insect infestations and so on, those projections could be tossed aside in the first drought or one army worm caterpillar. The USDA announced two weeks ago its forward estimates for corn and soybean production to be even higher than its previously unprecedentedly high predictions, resulting in an intraday boon for chicken producing stocks and a frantic selling off of corn and soybeans.

The Chicken Cycle

The Chicken Cycle is a theory, subscribed to by financial journalists and Hedge Fund managers alikexii, which postulates that the stock price of chicken producers follows a predictable cycle of highs and lows based on the fundamentals of supply and demand within the industry. The theory states that as chicken prices begin to raise, producers ramp up production to capitalize on margin maximizing prices. Prices continue to rise as a company increases its supply, albeit progressively slower as time goes on, until the market will not accommodate the high prices and demand slows down. Once the price ceiling is reached, producers are stuck with excess supply that far outstrips demand at the desired price point and companies are forced to cut prices in order to offload their perishable inventory. When demand hits its lowest point, it is not uncommon for producers to take a loss on each chicken produced. While reducing prices to meet demand, producers ratchet back production in order to reduce unnecessary costs. Once supply and prices shrink sufficiently, demand begins to rise once again and the price of chicken with it, causing the cycle to begin again.

The Chicken cycle takes place over 1-3 years and then repeats. The relatively short cycle, when compared to other commodities such as pork and beef, is due to the speed with which chickens mature and therefore the industry’s ability to quickly increase supply. Getting a full grown chicken to market only takes around 9 months starting from scratch (growing a layer, and then the offspring of said layer which is the chicken sold at market) which means so long as there is enough industrial capacity, producers can react fairly quickly to increased demand.

Another reason why the Chicken Cycle is so volatile and short lived is due to chicken’s absence from commodities exchanges which feature other agricultural products such as cattle, hogs, corn and soybeans. Because of this, the only way to bet on price fluctuations of chicken is by going long or short on chicken producers, most of which are heavily shorted at the momentxiii with PPC, SAFM and TSN shorted 63.57%, 38.95% and 9.17% respectivelyxiv. Speculating by shorting Chicken producers

exacerbates the cycle further by artificially lowering the price in the absence of any tangible and relevant news or earnings announcements. Investors are betting big on the chicken cycle, and given the rapid price declines, independent of recent positive earnings announcements, the bets are paying off. For example, despite delivering positive earnings results for both Q1 and Q2 of 2015, since 4/29/2015, Pilgrims Pride’s stock price has declined more than 15%, indicating that the frankly unprecedented short float and rock-bottom sentiment is pushing the price down in lieu of corroborating earnings information.

Company Analysis

Company Structure

Pilgrim’s Pride Corporation is a publicly traded company operating in the Packaged Foods sub-industry, under the Consumer Products industry of the Consumer Staples sector. Pilgrim’s produces chicken products on an industrial scale, churning out “7 billion pounds of live chicken annually” as the company’s website proudly states.xv Pilgrim’s Pride is vertically integrated and therefore controls every stage of the production process from feed to cleaning and packaging. The company contracts with over 4000xvi local breeders, hatcheries and growers. To these farms, Pilgrim’s provides the product (Eggs and Chickens in the later stages), feed and medical care for the

birds while the contracted farms nurture and raise the products. Pilgrim’s is headquartered in Colorado and conducts operations in 12 states, Puerto Rico and Mexico. Pilgrim’s pride is the largest chicken producer in Mexico, cementing its supremacy with the acquisition of Tyson de Mexico.

Products

Pilgrim’s pride produces three primary categories of chicken: fresh chicken (such as chicken breasts and legs for cooking), prepared chicken (usually frozen and precooked microwavable chicken) and a third, rather ambiguous category of “Export and Other Chicken.” Although Pilgrim’s Pride operations almost exclusively concern chicken production, turkey production accounts for a negligible portion of the company’s revenue. Pilgrim’s largest product line, fresh chicken, accounted for 66.2% of United States revenue in 2014xvii, followed by prepared chicken products at 25.1% and exports and other chicken products generating 8.7% of U.S. revenue. The fresh chicken and Mexican operations segments of Pilgrims Pride’s Revenue are expanding while exports and prepared foods are declining.

Customers

Pilgrim’s primary customers are restaurant chains, such as Chic-fil-A and Yum! Brands, food distributors, such as Sysco, and grocery store chains and wholesale clubs.

Competitors

Pilgrim’s Pride Corporation’s primary competitors are Tyson Foods and Sanderson Farms Inc. These three companies control 18%, 21 % and 7% of the chicken production capacity in the United States respectively. Despite Tyson’s larger market share, Sanderson Farms is actually the competitor most analogous to Pilgrim’s Pride Corp. due to its emphasis on chicken production, as opposed to Tyson’s more diversified product line which includes pork and beef.

Senior Management

Bill LovettePresident and Chief Executive Officer

Jayson PennExecutive Vice President of Sales & Operations

Walt ShaferHead of Operations Support

Fabio SandriChief Financial Officer

Charles von der HeydePresident of Pilgrim's de Mexico

Kendra WaldbusserHead of Food Safety and Quality Assurance

Eduardo NoronhaHead of Human Resources and Performance Management

Joe WaldbusserHead of Commodity Risk Management and Feed Ingredient Purchasing

Jose Antonio ValdesGeneral Director, Pilgrim's de Mexico

Alexander IvannikovHead of International

Porters Five Forces Analysis

Threat of New Entrants:

The threat of new entrants to the industry is very low due to the existing financial and competitive barriers to entry and a near oligopoly by low-cost/high-volume firms. The initial investment required to establish a major meat production company on a competitive scale is astronomical and nearly impossible. Additionally, contracting existing farms for a newly established company would require poaching said farms from multinational companies such as Pilgrim’s Pride Corp, Tyson Inc., and Sanderson Farms Inc. all of whom possess the financial and industrial power to retain the contracted farms. Another significant barrier is brand recognition and brand loyalty among consumers and corporate customers.

Threat of Substitute Products:

The threat of substitute products wrestling market share from chicken is extremely low. As neither worldwide nor domestic meat consumption is expected to decline, products which could be considered substitutes for chicken are pork, beef and plant based meat substitutes. In 2015, chicken consumption is projected to continue growing at a faster rate than all possible substitutes, with the exception of pork, and will again be the world’s most consumed meat. Threat of substitute products gaining ground on chicken is minimal due in large part to chicken’s relative healthiness and an increasing dietary awareness around the globe and specifically in the United States. Although plant based meat products have been growing in popularity for years, the demand for such products still lags behind that of meat products and is therefore negligible.

Bargaining Power of Buyers:

Bargaining power of buyers is relatively high. Pilgrim’s Pride supplies large companies such as Yum! Brands, Chic-fil-A and Walmart, all of whom have tremendous clout and bargaining

power. A major factor in the bargaining power of suppliers is the lack of product differentiation within the chicken producing industry. The only business segment conducive to the development of differentiated products is prepackaged food, where producers can capture consumers’ attention with unique and marketable products such as “Wing Dings” for example. As a commodity, demand for any specific company’s fresh chicken is due more to market volatility than differentiation, and ultimately comes down to price.

Bargaining Power of Suppliers

Bargaining power of suppliers is low as Pilgrim’s and competitors use speculative options and futures contracts to lock in the prices of necessary commodities, most notably corn, soy bean meal, and natural gas. The very nature of a commodity severely inhibits differentiation and just as the companies that Pilgrim’s supplies buy based on price, so to do chicken producers. There are a far greater number of commodity suppliers than chicken producers on the same scale of Pilgrim’s Pride, limiting commodity sales options to a select few companies and therefore limiting bargaining power. It is important to distinguish the bargaining power of suppliers from producers’ sensitivity to commodity price.

Existing Industrial Competition:

The exiting industrial competition is high. The three largest chicken producing companies in the US, Tyson, Sanderson Farms and Pilgrim’s Pride, compete for 90% of the United States market. This leaves a meager 10% market share for all other chicken producing enterprises, ranging from small producers like Foster Farms to family owned farms. The real battle between the top three chicken producers centers on diversification. In an attempt to free themselves from chicken cycle induced price volatility, top chicken producers have been attempting to diversify their product lines through mergers and acquisitions. Pilgrim’s Pride and Tyson Inc. recently engaged in a bidding war over Hillshire Brands, a pork products company, which Tyson won by making an offer of $8 billion, 33% higher than Pilgrim’s bid of $6 billion. Tyson’s $8 billion was a 70% premium to Hillshire’s share price. The massive premium Tyson paid for Hillshire Brands (considered by many experts to be excessive) perfectly illustrates competition between producers and how vital the diversification of product lines is to large-scale chicken producers.

SWOT

Strengths

Pilgrim’s Pride’s principle strength is in its acquisition of Tyson De Mexico earlier this year. With the current ban by several countries on all U.S. chicken exports, operations in Mexico, a country upon which no restrictions have been levied, will soften the financial blow to Pilgrim’s Pride earnings in the coming quarters. Another strength Pilgrim’s possesses is its focus on chicken and its devotion of 100% of its resources to the production of the worlds most consumed meat. This exclusive devotion to chicken has allowed the company to beat Q1 and Q2 EPS estimates by streamlining and cost cutting. Despite missing on revenue in Q1 and Q2 due to ban on U.S. poultry imports, the company has increased profitability due to increased efficiency.

Weaknesses:

Pilgrim’s primary weakness happens to be one of its aforementioned strengths. In pursuit of maximizing chicken production, the company has put itself at greater risk than a producer with varied industrial interests. Pilgrim’s diversified competitors, such as Tyson Foods, are better able to weather downturns in the chicken market, and indeed in all markets in which they do business, almost exclusively because they do not keep all of their eggs in one basket.

Opportunities:

Pilgrim’s understands the inherent danger of its current product offerings as was demonstrated in their bid for Hillshire Brands. The biggest opportunity currently in front of Pilgrim’s is the diversification of its business through strategic acquisitions. Companies like Johnsonville Sausage LLC and Wright Foods are attractive candidates.

Threats:

The largest threat to Pilgrim’s Pride is again its lack of diversity in its product offerings. Downturns are inevitable in the meat production business, as in any cyclical business, and with all its eggs in one basket Pilgrim’s is vulnerable. Pilgrim’s is in the uncomfortable position of being isolated within the most tumultuous meat producing industry and will suffer for it unless it diversifies.

Financial Analysis

Revenue and Cost of Revenue:

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Revenue Cost of Revenue

As the above graph illustrates fairly well, revenue for PPC has been growing at a consistent pace since the beginning of 2010. Although growth has begun to slow, cost of revenue has declined at a much faster pace than revenue growth has, leading to robust margins. The exception to this trend was in 2011 when cost of revenue actually exceeded revenue and led to a substantial loss that trickled all the way down to net income as the graph below illustrates. This surge in the cost of generating revenue was brought on primarily because of increased feed costs such as corn and soybean meal. This is a rather worrying revelation because despite the company’s ability to perform exceedingly well when variable costs remain low (the company has become more efficient quarter over quarter with net income growth consistently outpacing revenue growth) their bottom line displays concerning susceptibility to unpredictable commodity prices. The USDA reported its predictions going forward for corn and soybeans on 8/13. Expected yields are predicted to be even higher than previous estimates, pushing the price of corn and soybeans even lower and buoying the intraday price of PPC and competitors SAFM and TSN. A larger than expected crop of corn and soybeans practically ensures PPC quarterly results will be robust in the short term as their cost of revenue continues to decrease along with feed prices.

Net Income

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Pilgrim’s Pride has experienced dramatic fluctuations in net income over the past 10 years. It suffered substantially in 2008 due to the instability of the economic environment and the company’s lack of preparation for that instability but also from a nearly 100% increase in the price of corn over the previous year. The net loss for the year was close to $1 billion, a profit decrease of -2225.5% from the previous year, and the company filed for Chapter-11 bankruptcy. The company managed to decrease its net loss by 84.78% in 2009 and return to profitability in 2010 with a 157.24% shift, resulting in a net income of $90 million. The company encountered financial issues again in 2011 experiencing a -671.26% decline in net income from the previous year, resulting in a $497 million loss. This massive decline was the result of the cost of revenue outpacing revenue for the period, attributed primarily to a substantial increase in chicken feed prices (again). Since 2011 however the company’s bottom-line has strengthened every year, growing by 135.01% and 216.09% in 2012 and 2013 respectively. Although net income growth slowed to 29.27% in 2014, this is still an impressive rate of growth and only seems unimpressive relative to the previous 2 years. The company’s susceptibility to feed price fluctuations is to blame for the substantial net loss in 2011 and as was previously stated, the dependence of the bottom line on unpredictable feed prices is a major cause for concern in a long-term play.

Key Ratios

Gross Margin

PPC has performed favorably over the past 12 months in relation to its peers. Gross Margin currently sits at 19.3%, 8.9% and 21.4% for PPC, TSN and SAFM respectively. The S&P 500 far outpaced the three companies with a GM average of 40.9% over

the trailing 12 months. Although both PPC and SAFM have experienced exceptional gross margin growth over the past 4 years, there is evidence of tapering over the past 12 months.

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Operating Margin

PPC is performing best in its peer group with an operating margin of 17% followed by SAFM with 16.2% and TSN with 4.2%. The S&P has a substantially higher number of operating costs on average than PPC and its peer group with an operating margin of 13.72% over the last 12 months. PPC just barely edged out SAFM over the previous year and boasts the more efficient operation of the two exclusively chicken producers. Operating Margin has followed a similar pattern to gross margin for PPC over the past 10 years, contracting sharply in both 2008 and 2011 and expanding over the past 3 years.

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Net Profit Margin

PPC and SAFM are currently outpacing the S&P 500 in Net Profit Margin, clocking 10.24, 10.54 and 8.15% respectively. TSN falls short of its peer group and the S&P 500 with 2.68% net profit margin. A strong net profit margin is one of the most important fundamental metrics when valuing a company, indicating a highly efficient company with the ability to generate profit. Although revenue growth has been slowing over the past year, PPC’s net income continues to grow, indicating a certain amount of fat trimming at PPC.

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Profit Margin

The three profitability graphs above perfectly illustrate the stability of TSN when compared to PPC and SAFM. Although the two chicken producers achieve astonishing profitability in good times, they suffer far more when external factors press them. TSN on the other hand has remained stable over the past 10 years even during the economic crisis from 2007-2009. That being said, it has not shared in the plentiful earnings growth experienced by PPC and SAFM over the past 4 years. This volatility dichotomy between TSN and PPC and SAFM is a constant theme throughout this ratio analysis and the primary concern for investors when looking at these companies.

ROE

PPC currently outperforms its peer group and the S&P 500 with a 59.35% ROE. The S&P 500 has returned 11.59% on average over the last 12 months. TSN and SAFM returned 13.43% and 34.77% respectively. ROE is a substantially important indication of whether or not a company can make good use of the equity it has generated. PPC excels in this area, exhibiting an impressive ability to convert equity in to profits. ROE can be misleading though as it only calculates the return on the company’s current level of equity. If a company has decreased its equity in favor of an increased debt load (as both PPC and SAFM have done recently) it can skew the metric by decreasing the denominator of the equation rather than increasing the numerator. In the case of PPC and its peer group all three have increased their debt load and their ROE along with it.

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ROA

Return on assets for PPC and SAFM have mirrored each other to a certain degree over the last 10 years whereas TSN has remained, as it has in so many of the previously discussed metrics, lower but ultimately more stable than the peer group. This can largely be attributed to its diversified product line in contrast to PPC and SAFM which focus solely on chicken. This limits the potential returns for TSN as well, while a less risky portfolio limits downside risk, it often does so at the expense of aggressive upside potential. This is clear as both PPC and SAFM have increased their respective ROA since 2011 to nearly 30% while TSN has remained hovering around 5%.

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A/R Turnover

AR turnover is very high between PPC and its peer group. Over the past 12 months PPC turned over its AR 23.16 times, TSN and SAFM did the same 25.16 times and 25.61 times respectively. The S&P 500 lags behind with 4.69.This illustrates better than most the incredible transformation PPC underwent during the crisis with a staggeringly large increase in A/R turnover, resulting from a substantial decline in accounts receivables and therefore an inflated turnover ratio.

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A/R Turnover

Quick Ratio

PPC and SAFM have excellent quick ratios, an essential metric for determining its current liquidity. PPC, SAFM and TSN currently exhibit quick ratios of 1.21, 1.79 and .52 respectively.

The S&P lags behind PPC and its peer group with .4. A quick ratio of 1.21 is heartening for the fact that in a crisis situation PPC will be insulated from an immediate need to satisfy short-term liabilities. All three companies included in this analysis have become less liquid over the past year, am unfavorable fact to be sure but not necessarily a red flag.

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P/E Ratio

Current P/E ratio for PPC is 7.18, 16.67 for TSN and 5.49 for SAFM. The current S&P 500 average P/E is 22.51. Food processors tend to operate at a lower P/E than other large companies due in large part to the measurable value that is inherent to the industry. A cursory investigation in to a meat producer reveals, fairly easily, its value at the present time and a relatively accurate measurement of its performance going forward as opposed to say a tech stock which will often trade at an inflated multiple. A high P/E is often treated by inexperienced and risk averse investors as an inherently bad sign, when in fact it often represents optimism in the future growth of a security. The point is that a P/E ratio is often misleading on its face and although the P/E for PPC is low when compared to the S&P and TSN, it is low because the market has a dubious vision for its future, and may not in fact be a hidden gem.

P/B Ratio

The most damning evidence against PPC is its Price to Book Ratio. The book value of PPC has plummeted over the last 12 months. The P/B ratio currently stands at 6.47, 1.8 and 1.68 for PPC TSN and SAFM respectively. The higher the P/B ratio, the higher the premium that investors pay on a company’s equity and by this measure PPC is more than three times as expensive as its peers and twice as expensive as the S&P which currently exhibits a P/B ratio of 2.96. The decrease in P/B for PPC over the past year is due to an increase in debt incurred earlier this year. The reason for the increase in debt financing has been attributed to a one time dividend which some suggest was an in house attempt to instigate a massive short squeeze. If indeed PPC attempted to instigate a short squeeze with a debt-financed dividend, it failed and indeed only reinforced the perception that

the company’s principle concern was its stock price rather than its intrinsic value and health.

5-Year Forward PEG Ratio

PPC takes the lead in forward-looking PEG ratio of .77. TSN and SAFM currently exhibit .82 and -.40 respectively. The PEG ratio is arguably the most important valuation measure, predicting the price and investor would pay for every dollar of EPS growth going forward. According to the PEG ratio of PPC the company is trading at a 23% discount. By the same measure, TSN is trading at an 18% discount and SAFM is predicted to have negative earnings growth going forward.

Share Buybacks

Share buybacks in the S&P 500 reached their highest level since Q2 2007 in Q1 2014. Buybacks remain high in the first quarter of 2015, with nearly 600 billion dollars’ worth of shares repurchased by issuing companies. Share buyback ratio for PPC, TSN and SAFM stand at -4.9, 1.4 and -.5. Share buybacks are a point of contention between short term and long-term shareholders. As Warren Buffet pointed out, a company only adds value to investors if repurchases occur at a price below the stocks intrinsic value, otherwise the practice artificially inflates an already overvalued stock’s price. Short term investors tend to care less why and at what price point the buyback occurs because buybacks almost always raise the price of a stock in the short term. Long-term value investors may feel that a company is more focused on short-term price movement than reinvestment in long-term profitability and the intrinsic value of the company. An analysis of buybacks by Bloomberg and S&P Dow Jones Indices unearthed a startling realization toward the end of 2014, that companies within the S&P 500 spent 95% of their earnings on buybacks. Buybacks have been integral to the success of the current bull market but, many believe, have left companies severely weakened and stagnant. Despite its low buyback ratio, PPC announced $150 million in buybacks over the next 12 months.

Beta

The beta for PPC, TSN, SAFM and the average for the S&P 500 are currently 1.07, .45, 1.36 and 1.04 respectively. Beta is traditionally used to determine the relative investment risk of a company. A score below 1 is usually considered very low risk and a score hovering around 1 is considered average. However, just like the P/E ratios limitations mentioned earlier, Beta often falls short of predicting the risk associated with an investment, as PPC and its competitors have been subjected to high price volatility over the past year.

Valuation

Several valuation models were run to ensure accurate and realistic valuation of Pilgrim’s Pride Corporation.

Discounted Free Cash Flow

A two-stage model was used to discount free cash flow to the firm. The first of two valuations using this method assumes that PPC will grow at an annual rate of 4.11%, the average revenue growth rate for the firm over the past 5 years. Revenue growth was used as the sustainable growth rate due to inconsistency in other metrics and an unrealistic sustainable growth rate of over 11%. Free cash flow was discounted back at the WACC of 8.59%. The model was run out to 2019 and valued cash flows for that period at $3.868 billion. The discounted terminal cash flow to the firm was calculated as $9.802 billion, for a total of $13.671 billion. With 259.7 million shares outstanding each share is valued at $52.65, 138.96% appreciation.

A second two-stage free cash flow model was run using estimated annual FCF values over the next 5 years rather than a consistently growing FCF, An unrealistic assumption based on past performance. This second model was also run out to 2019, utilized a WACC of 8.59% (calculated using CAPM) and used 2.11% to calculate the terminal FCF. This model estimated the present value based on PPC’s future free cash flows to be $35.69 per share. The second FCF valuation model is displayed at the top of the right column on this page.

Discounted Free Cash Flow Model: PPC

Base Case AssumptionsHigh Growth Rate (Next 5 years) 4.66%WACC (During High Growth Rate) 8.59%Stable Growth Rate Thereafter 2.11%WACC (During Stable Growth Rate) 8.59%ResultsFCF Through 2019 (In Mil) $2,391.65FCF Terminal Value (In Mil) $6,876.81Total (In Mil) $9,268.46Number of Shares (In Mil) 259.7Value of Firm $35.69Current Share Price $21.06Price Appreciation 69.47%

Residual Income

A residual income model was also used to value PPC. The discount rate of 11.68% was calculated using CAPM Using 2014

EPS of $2.75, and book value per share of $4.46, with the 10-year treasury yield as the risk free rate, PPC’s one-year unlevered beta and the market return rate of 11%. The growth rate was calculated at 11.43%, the average of revenue and net income growth over the past 10 years for PPC. This model delivered another unrealistic valuation when based on an 11.43% growth rate, however when modified to reflect a growth rate similar to the second DFCF valuation above, a much more reasonable valuation of $16.03 was reached. This model postulates a price depreciation of 22.89%.

Residual Income Model: PPC

Base Case AssumptionsBV/Share $8.45Discount Rate 11.62%Stable Terminal GR 2.11%ResultsRI Through 2019 (In Mil) $1,134.83RI Terminal Value (In Mil) $1,868.86Total (In Mil) $3,003.69Number of Shares (In Mil) 259.7Value of Firm $16.03Current Share Price $21.06Price Appreciation -23.88%

Target Price

By averaging two of the valuations run for this company, a target price of $25.86 has been settled upon going forward. As of now this target price would return 22.79% on investment.

Technical Analysis

The 50 day SMA for PPC dipped below the 200 day SMA in mid-March and has remained below it ever since. As of mid-June, PPC’s 20 day SMA sunk below its 50 day SMA. Although not a guarantee of future price decline, from a technical standpoint the forward direction for the stock will most likely be downward in the near future.

PPC’s relative strength index is inconclusive as it currently sits at 49.53, just shy of perfectly neutral. Near the end of July, PPC was oversold but the opportunity to capitalize on that has past.

Scenario AnalysisBull Case

A bull case could be made for Pilgrim’s Pride going forward but under specific time tables. In the very near term the company has seen rapid price depreciation as a symptom of its unprecedented short float, likely a play on the chicken cycle which many believe to be peaking this summer. Despite the short interest-spawned price decline, during the same period it has surpassed quarterly EPS estimates twice, leading to large intraday price appreciation followed by a return to the red zone. The juxtaposition of rock bottom sentiment and earnings surprises can lead to nearly 10% increases in a single day.

The USDA announcement concerning soybean yields offers another interesting incentive to buy in to PPC. The higher than expected increase in yields and the subsequent larger than expected decrease in price for corn and soybeans (and therefore feed) will inevitably lead to higher than expected Q3 earnings for chicken producers. The shorts are adamant and the float still remains around 60% short, which could lead to a contrarian Christmas in October.

The inherent volatility of the situation in which PPC currently finds itself could be a short-term bonanza for investors. Should an investment be made with the intention of selling following the company Q3 earnings report, the company would be rated a buy.

Bear Case

During the analysis of this stock the reasons to buy it were slowly outnumbered by the risks associated with it going forward. As of now the company is performing well, consistently beating expectations and reflecting a low price to earnings ratio that causes many investors to raise their eyebrows at the plummeting stock price. The staggering short interest currently occupying 60% of PPC’s float is a symptom of more than just the chicken cycle and the looming potential downturn, but also of the fact that although the company is healthy enough to weather a downturn, it is not as healthy as it once was, nor is it as healthy as its peers. The short float in PPC is nearly 20% higher than that of competitor Sanderson Farms, which is equally exposed to chicken and its cyclical nature yet remains favored over PPC. Over the trailing 12 months, Pilgrim’s Pride’s debt has increased as its equity has decreased, leading to a higher than average Price to book ratio and raising questions about the company’s priorities concerning its liquidity going forward. Taking on more debt isn’t automatically a bankruptcy sentence, but the question must be posed as to whether PPC has forgotten its 2008 woes or simply dismissed them as a freak occurrence. Either way the trend of increasing the debt to equity ratio is frightening.

There is a lot of talk among amateur investors about how this variable or that variable is working in the stock’s favor: feed ingredient costs are at unprecedented lows due to over production, avian flu (by lowering supply) has kept prices higher and thus elongated this chicken cycle peak, acquisition of Tyson de Mexico is a potential workaround for numerous import bans facing U.S. chicken and the fact that beef and pork’s higher relative current cost has kept chicken demand high. The problem with all of these examples is that they are impermanent and fleeting advantages born out of the metaphorical stars aligning rather than any internal innovation or venture (with the obvious exception of the Tyson de Mexico acquisition.) In the current environment there may very well be a bountiful short term buying opportunity, but there are just far too many imminent threats to the profitability of this company to justify a buy.

Another risk that is not often talked about but cannot be ignored is the approaching winter and migratory patterns for wild fowl that accompany it. Pilgrim’s Pride grows and processes its chicken in the southern states, and risk of transmission from migratory waterfowl (which experts believe to be the primary carriers of the virus) to company owned birds increases dramatically as the winter months approach.

Recent News

Reports by the USDA on 8/12/2015 indicate that the yields for corn, and other feed ingredients, have not only exceeded Wall Street predictions, but also previous USDA predictions. Futures for these commodities fell sharply, with corn trading down 7% and soybeans trading down 6% at midday.

A recent rash of chicken mass murder has taken place at several PPC feeder farms in South Carolina. The deaths of the chickens, all of which were owned by

PPC, were caused by deliberate sabotage of life support systems integrated in to the barns. The level of precision with witch the culling was carried out indicated a level of knowledge consistent only with fellow chicken famers. The case highlighted a potential PR nightmare for Pilgrim’s, as the acts can be attributed to vehement rivalry between contracted farmers. This rivalry is incubated and exacerbated by Pilgrim’s zero-sum bonus system, whereby the bonus of the top producers comes out of the payment to the bottom producers.

Financial Statements

PPC Consolidated Statements of Income

In Millions Except Per Share Data201

0 2011201

2201

3201

4 TTM

Revenue688

2 7536812

1841

1858

3848

5

Cost of revenue642

1 7677768

6756

6718

9684

7

Gross profit 461 -142 436 845139

4163

9

Operating expenses:Sales, General and administrative 210 206 177 181 189 193Restructuring, merger and acquisition 66 26 8 6 2 5

Total operating expenses 276 232 185 187 191 198

Operating income 185 -374 250 659120

3144

0Interest Expense 106 112 105 87 82 64Other income (expense) -13 -2 8 2 -19 -27

Income before taxes 66 -487 153 574110

2134

9Provision for income taxes -24 9 -21 24 391 480Net income from continuing operations 90 -496 174 550 711 869Other -3 -1 0 0 0 0Net income 87 -497 174 550 712 869Net income-common shareholders 87 -497 174 550 712 869Earnings per share

Basic 0.41 -2.32 0.7 2.12 2.75 3.35Diluted 0.41 -2.32 0.7 2.12 2.74 3.35

Weighted average shares outstandingBasic 214 214 250 259 259 259Diluted 214 214 250 259 259 260

EBITDA 403 -167 405 811134

0156

8

PPC Consolidated Balance SheetsIn Millions Except Per Share Data 2010 2011 2012 2013 2014Assets

Cash and cash equivalents 106 42 68 508 576Short-term investments 2 0 97Total cash 108 42 68 605 576Receivables 322 349 385 366 379

Inventories 1029 879 950 809 790Deferred income taxes 3 2 27Prepaid expenses 81 52 56 62 95Other current assets 167 142 83 85 17Total current assets 1710 1464 1543 1929 1885

Non-current assetsGross property, plant and equipment 2741 2730 2750 2770 2873Accumulated Depreciation -1383 -1488 -1560 -1618 -1690Net property, plant and equipment 1358 1242 1190 1152 1183

Equity and other investments 12 0Intangible assets 49 44 38 33 27Deferred income taxes 23 71 97 19Other long-term assets 67 58 46 40 24Total non-current assets 1508 1415 1371 1243 1234

Total assets 3219 2880 2914 3172 3119

Liabilities and Stockholders' EquityCurrent liabilities

Short-term debt 58 16 16 410 48Accounts payable 337 341 326 374 352Deferred income taxes 39 79 104 16 25Taxes payable 7 0 3Accrued liabilities 298 282 284 283 312Other current liabilities 0 5Total current liabilities 739 717 730 1083 745

Non-current liabilitiesLong-term debt 1281 1458 1149 502 4Deferred taxes liabilities 3 14 76Minority interest 6 3 3 3 3Other long-term liabilities 117 146 126 80 97Total non-current liabilities 1408 1607 1277 599 180

Total liabilities 2146 2324 2007 1683 925Stockholders' equity

Common stock 2 3 3 3Additional paid-in capital 1443 1443 1642 1653 1662Retained earnings -349 -844 -670 -120 591Accumulated other comprehensive income -21 -46 -69 -46 -63

Total stockholders' equity 1073 556 906 1490 2194Total liabilities and stockholders' equity 3219 2880 2914 3172 3119

PPC Consolidated Statement of Cash FlowsIn Millions Except Per Share Data 2010 2011 2012 2013 2014 TTMCash Flows From Operating Activities

Net income 87 -496 174 550 711 869Depreciation & amortization 231 209 147 151 156 154Amortization of debt discount 0 0 0 2 2Investment/asset impairment charges 26 23 3 4 5

Deferred income taxes -69 -7 -1 -5 79 154Stock based compensation 1 1 3 5 4Accounts receivable -9 -64 -14Inventory -286 123 -66 143 11 42Prepaid expenses -45 27 -3 -6 -38 -11Accounts payable -91Income taxes payable 5 -34 -22 75 -144Other working capital 145 45 -8 55 29 126Other non-cash items 25 6 0 6 37 38

Net cash provided by operating activities 15 -129 200 879 1067 1239

Cash Flows From Investing ActivitiesInvestments in property, plant, and equipment -179 -136 -90 -116 -171 -168Property, plant, and equipment reductions 29 29 31 11 9Acquisitions, net 37Purchases of investments -17 -5 0 -97 -55 -18Sales/Maturities of investments 68 16 1 152 18Other investing activities 15Net cash used for investing activities -114 -58 -60 -182 -63 -159Cash Flows From Financing ActivitiesDebt issued 2439 1016 851 506 1680Debt repayment -3197 -882 -1161 -759 -910 -1184Common stock issued 800 198 0Other financing activities -71 -7 3 4 -1496

Net cash provided by (used for) financing activities -29 127 -111 -250 -906 -1000Effect of exchange rate changes -2 -4 -2 -7 -30 -32Net change in cash -130 -64 27 440 68 47Cash at beginning of period 236 106 42 68 508 527Cash at end of period 106 42 68 508 576 574

Free Cash FlowOperating cash flow 15 -129 200 879 1067 1239Capital expenditure -179 -136 -90 -116 -171 -168

Free cash flow -165 -265 109 762 895 1070

Disclaimer

All information contained in this document is the opinion of, and the result of analysis by an independent and unlicensed individual for the sole purpose of displaying, in an accessible and ostentatious format, skills relevant to careers for which the individual in question will be applying. It is not intended and should not be construed as investment advice. The analysis is not the work of professionals, is not a recommendation of any particular security, strategy or investment product, and should in no way be used to make financial decisions or investments. The opinions of the

author are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed to be accurate or complete.

The individual who prepared this report cannot stress enough its unofficial nature. Please consult your financial and tax advisors before engaging in any transactions.

I, WILLIAM TYLER STREETER, MAKE NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, ABOUT THE ACCURACY OR SUITABILITY FOR ANY USE OF THIS REPORT AND EXPRESSLY DISCLAIM RESPONSIBILITY FOR ANY LOSS OR DAMAGE, DIRECT OR INDIRECT, CAUSED BY THE USE OF OR RELIANCE ON THIS REPORT, OR FURTHERCOMMUNICATION PROVIDED IN RELATION TO THIS DOCUMENT.

References

i http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=2

ii http://knoema.com/qhswwkc/us-gdp-growth-forecast-2015-2019-and-up-to-2060-data-and-charts

iii http://finance.yahoo.com/news/yellen-first-fed-rate-hike-123331252.html

iv http://www.sca.isr.umich.edu/

v http://www.nationalchickencouncil.org/about-the-industry/statistics/per-capita-consumption-of-poultry-and-livestock-1965-to-estimated-2012-in-pounds/

vi http://www.reuters.com/article/2011/12/22/us-usa-beef-consumption-idUSTRE7BL1MI20111222

vii http://www.reuters.com/article/2015/06/12/health-birdflu-usa-timeline-idUSL1N0Y334G20150612

viii http://www.businessinsider.com/dozens-of-countries-are-banning-us-poultry-because-of-a-huge-bird-flu-outbreak-2015-4

ix http://seekingalpha.com/article/2797205-the-chicken-short?page=2

x http://futures.tradingcharts.com/chart/CN/M

xi http://harvestpublicmedia.org/content/usda-predicts-low-corn-prices-here-stay#.Va6cNKRViko

xii http://www.investhuckleberry.com/blog/why-we-re-shorting-chickens

xiii http://www.bloomberg.com/news/articles/2014-11-25/shorting-chickens-becomes-hot-trade-after-prices-surge

xiv http://www.gurufocus.com/ownership/TSN

xv http://www.pilgrims.com/our-company/about-us.aspx

xvi http://www.bloomberg.com/news/features/2015-06-02/who-s-murdering-thousands-of-chickens-in-south-carolina-

xvii http://ir.pilgrims.com/secfiling.cfm?filingID=802481-15-15&CIK=802481#PPC-20141228X10K_HTM_S9585E5EDE15B2375CFBA9A6876CAF366