Pilgrim's Pride Worth Watching As Commodity Chicken Cycle May Peak This Summer

In a report published Friday, Cleveland Research analyst Michael Piken initiated coverage on

with a Neutral rating and a price target of $25. Analyst Michael Piken believes that the multi-year positive chicken cycle is peaking this summer. "Our research suggests that 2016 US chicken expansion could reach 4-5% versus the public chicken companies expectations of ~3% growth which we believe could impact pricing during 2016/17." Piken expects increased pork availability and "potentially more dark meat" in the US market, on account of the Avian Influenza bans, to could "hurt overall chicken pricing in outer quarters." In the report Cleveland Research noted, "We see lower feed costs and Pilgrim's internal cost savings initiatives providing some margin relief during the potential down-cycle and as a result we are forecasting Pilgrim's US operating margins remaining ~200bps above commodity producers during the next downcycle." Pilgrim's decision to shift about 25 percent of its production to antibiotic free could eventually add up to $0.11-$0.37 to annual EPS. Moreover, Pilgrim's Mexico business could contribute up to $0.30 per share of earnings growth over the next 5 years, backed by market growth and the company's acquisition of Tyson's Mexican chicken business in 2015. "Our expectations for weaker 2016/17 fundamentals is reflected in our relatively in-line $2.30/sh F16 and $1.59/sh F17 forecasts, which are down 32% and 46% from our $3.39/sh F15 estimate," Piken added.