Date: 6/11/2018

Pilgrims Pride Corp. (NSDQ: PPC)

$ 20.27

Data Overview Summary

Target Price $28.43
 The company’s acquisitions strategy have strengthen their business
Potential Upside/Downside 40%
model and operational efficiency through economies of scale. Revenue
52 Week High-Low $38.39 - $19.25
exceeded $10.6 billion, representing a 14.7% growth over the previous
Beta (5-year monthly) 0.25
year. Consequently, profitability margins improved at all levels.
Market Capitalization $5.05B
Dividend Yield N/A  Growth drivers is solely based on acquisitions in other markets such as
Industry Food Processing Europe. As a result, we do not expect large surprises in growth going
Current Ratio 1.73x forward. Its product baseline is chicken, the 2nd most consumed protein
Debt/Capital 59.2% in the world. By the end of 2017, Pilgrims supplied approximately 17.3%
EBITDA Margin 12.5% of total chicken production in the US.
Price/Earnings (P/E) 7.76
Price/Book (P/B) 2.90  The company’s financial health is sound, and improved throughout
Price/Cash Flow (P/CF) 6.65 over the previous year albeit creditworthiness deteriorated mainly
Earnings Yield 12.9% reflecting the additional debt accumulated to fund the acquisitions.
Net Debt/Equity 1.14 Abbreviated Financials
Value Score : A Income Statement (USD MIL) FY0 FY-1
Revenue 10,768 7,931
P/E rel to industry A Gross Income 1,472 914
P/B rel to industry C EBITDA 1,360 895
EBIT 1,082 715
P/E/G Ratio to Industry N/A
Pretax Income 982 673
P/S rel to industry A Net Income 695 441
P/CF rel to industry B Common Shares 249 262

EV/EBITDA rel to industry A Balance Sheet (USD MIL) FY0 FY-1

Piotroski F-Score 8 Cash & ST Investments 582 293
Growth Score : C Fixed Assets 2,095 1,834
Total Assets 6,249 5,022
Proj. EPS Growth (𝐹1/𝐹0 ) -0.95% Current Liabilities 1,453 1,185
Hist. EPS Growth (𝐹0 /𝐹−1) 65.14% LT Debt 2,636 1,396
Total Liabilities 4,402 2,944
CFO Growth (𝐹0 /𝐹−1) 6.07% Total Shareholders’ Equity 1,846 2,078
CFO Growth (𝐹0 /𝐹−2) -17.9%
Return on Equity (ROE) 34.5% Cash Flow Statement (USD MIL) FY0 FY-1
Net Income 718 480
Dividend Growth (𝐹0 /𝐹−1) N/A Cash From Operations 801 795
EBITDA Growth (𝐹0/𝐹−1) 51.9% Capital Expenditures -340 -341
Cash From Investments -992 -328
Momentum Score : C
Cash Dividends Paid 0 -715
Last Earnings Surprise D Cash From Financing 466 -828
Earnings Momentum C
Operating Margin Growth B
Sales Growth B Consensus Recommendation Author
▼
Analyst Earnings Revision E ██████████████████ Glen Borg
Growth Momentum D Sell Strong Buy Equity Research Analyst
# of Analysts: 8 Contact Number: +356 99747380
Value Momentum A Upgrades Last 30 Days: 1 Email: glen.borg.gir@gmail.com
Downgrades Last 30 Days: 4 LinkedIn: linkedin.com/in/glenborg/

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Company Overview
Pilgrim’s Pride Corporation is a retail feed store. It is a producer and seller of chicken with operations in the United States, Mexico and
Puerto Rico. It is engaged in the production, processing, marketing and distribution of fresh, frozen and value-added added chicken
products to retailers, distributors and foodservice operators. After a long period of stable no growth in customers serviced, in 2017
the company managed to deliver its first significant growth in customers, now exceeding 5500 (previously around the 5000 level).

It offers a range of products to its customers through national and international distribution channels. Its fresh chicken products consist
of refrigerated (non-frozen) whole chickens, whole cut-up chickens and selected chicken parts that are either marinated or non-
marinated. Its prepared chicken products include ready-to-cook and individually frozen chicken parts, strips, nuggets and patties, some
of which are either breaded or non-breaded.

As of 2017, the company marketed its portfolio of fresh, prepared and value-added chicken products across the United States, Mexico
and in approximately 100 other countries. Pilgrim’s employed approximately 51,300 employees and has the capacity to process
approximately 45.2 million birds per five-day work week for a total of approximately 13.3 billion pounds of live chicken annually.
Approximately 5,100 contract growers supply poultry for the Company’s operations. In 2017, the company produced 10.0
billion pounds of chicken products, generating approximately $10.8 billion in net sales and approximately $694.6 million in net income.

The company had 3 major acquisitions; (i) On June 29, 2015, it acquired 100% of the equity of Provemex Holdings, LLC and its
subsidiaries (together, “Tyson Mexico”) from Tyson Foods, Inc for a cash purchase of $373 million. Tyson Mexico is a vertically
integrated poultry business based in Gómez Palacio, Durango, Mexico. (ii) On January 6, 2017, it acquired 100% of the membership
interests of GNP from Maschhoff Family Foods, LLC for a cash purchase price of $350 million. GNP is a vertically integrated poultry
business based in St. Cloud, Minnesota. (iii) On September 8, 2017, it acquired 100% of the issued and outstanding shares of Granite
Holdings Sàrl and its subsidiaries (together, “Moy Park”) from JBS S.A. for a cash purchase price of $301.3 million and a note payable
to the seller in the amount of £562.5 million. Moy Park is one of the top-ten food companies in the U.K., Northern Ireland's largest
private sector business and one of Europe's leading poultry producers.

Reasons to Buy
I. Undervalued, particularly when compared to its peers. The company appears to be an attractive purchase from a
relative valuation perspective. Additionally, the whole industry is currently undergoing a rough period pushing
stock prices downwards as a result of the new regulatory controls being implemented and the increasing
possibility of plant-based protein products which could potentially be a substitute for poultry and other meat
products. We believe these events will have an inconsequential impact on the company’s cash flows and that the
market has overreacted to such information providing the opportunity to buy the stock at a discounted price.

II. Dominant position. The company has approximately 17.3% market share in the US based on ready to cook
production in 2017, according to WATTPoultryUSA Magazine. Total chicken production grew significantly with
recent acquisitions in excess of 13 billion pounds per year making it one of the largest chicken producers globally.
This gives the company competitive strength due to its economies of scale and the opportunity to keep expanding
through further acquisitions.

III. The product. Chicken is considered one of the healthiest source of food (protein) and as a result is expected to
keep growing in consumption. According to Statista, poultry is the fastest growing meat sector as per capita meat
consumption worldwide is expected to increase at a CAGR of around 1.50% until 2030. Accordingly, poultry
consumption (currently 2nd worldwide) is expected to surpass pork consumption (currently 1st worldwide). Due
to its high consumption, production turnover is also very high (Inventory turnover day’s stands at 45, way below
the industry median of 59). Lastly, the simplicity of the product maintains operating expenses to exceptionally low
levels.

IV. Improvement in operating efficiency and synergy. Recent extensive cap ex should reflect positively on the
company’s financial performance going forward. Additionally, the company is aiming at reducing its fixed costs
consistent with the value of JBS. This shall contribute to reduce the company’s operating leverage and business
risk in the event of a downturn in poultry demand.
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 V. Relationship with JBS. The synergies between both companies relating to cost savings, commodity risk
management and industry experience along with potential financial aid in the case of financial difficulties provide
the investor with a supplementary safety net.

Reasons to Sell
I. Limited revenue growth. The company’s production facilities are operating at full capacity. As a result, revenue
growth is dependent on the movement in wholesale chicken prices and/or further acquisitions which entails an
extensive amount of cap ex.

II. Regulatory Controls. The industry expects an increase in regulation concerning discharges to the environment.
Although the company does not anticipate that such increase in regulation will have a material adverse effect on
the company’s profitability as capital expenditures associated with these upgrades, which will be spread over a
number of years. However, new environmental, health and safety requirements that are more stringent or other
obligations related to the investigation or clean-up of contaminated sites in the future may have a material effect
on the company’s business and operations in the future. Additional regulation may be viewed as a positive factor
as they fortify the barrier to entry for new competitors in the industry

III. Potential outbreak of livestock diseases. Albeit the company takes the necessary precautions to ensure that its
plants and other facilities operate in a sanitary and environmentally sound manner, an outbreak of disease could
have a material impact on the companies financial performance.

Ratio Analysis
Profitability Ratios Industry Median FY2016 FY2017 % Change
Gross Margin (Gross Profit/ Revenue) 28.8% 11.5% 13.7% 18.6%
EBITDA Margin (EBITDA/ Revenue) 12.6% 11.9% 12.5% 5.2%
Operating Margin (EBIT/ Revenue) 9.7% 9.0% 10.0% 10.7%
Net Margin (Net Income/ Revenue) 5.2% 5.5% 6.3% 13.6%
Return on Assets (Net Income/ Average Assets) 7.9% 10.5% 12.0% 14.1%
Return on Equity (Net Income/ Average Equity) 12.3% 26.3% 34.5% 31.1%
Asset Turnover Ratio (Revenue/ Total Assets) 1.20x 1.58x 1.72x 9.1%

Liquidity Ratios Industry Median FY2016 FY2017 % Change

1.7x 1.5x 1.7x 13.4%
Current Ratio (Current Assets/ Current Liabilities)
0.9x 0.7x 0.9x 23.3%
Quick Ratio ((Current Assets – Inventories )/ Current Liabilities)
- 0.3x 0.4x 62.2%
Cash Ratio (Cash & Cash Equivalents/ Current Liabilities)
- 36.3x 41.8x 15.3%
Defensive Interval Ratio ((Cash + Receivables)/Daily Cash Expense)

Solvency Ratios Industry Median FY2016 FY2017 % Change

- 40.5% 59.2% 46.4%
Gearing Ratio (Total Debt/ (Total Debt + Total Equity))
2.2x 1.2x 1.6x 31.4%
Net Debt to EBITDA (Net Debt/ EBITDA)
- 28.1% 42.9% 52.8%
Debt to Asset Ratio (Total Debt/ Total Assets)
2.2x 2.4x 3.4x 40.0%
Financial Leverage Ratio (Total Assets/ Total Equity)
- 19.7x 13.9x -29.3%
Interest Coverage Ratio (EBITDA/ Interest Expense)

Efficiency Ratios Industry Median FY2016 FY2017 % Change

Inventory Turnover Ratio (Cost of Sales/ Average Inventories) 6.2x 7.9x 8.3x 5.1%
Days of inventory on hand (DOH) 58.9x 46.1x 44.5x -3.5%
Receivables Turnover Ratio (Revenue/ Average Receivables) 12.1x 18.2x 21.2x 16.5%
Days of sales outstanding (DSO) 30.0x 20.0x 17.5x -12.5%
Payables Turnover Ratio (Cost of Sales/ Average Trade Payables) 10.5x 12.1x 13.2x 9.1%
Number of days of payables 34.6x 30.1x 27.6x -8.3%
Working Capital to Sales Growth (Working Capital/ Revenue Growth) 0% -2.8% -1.8% n/a

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Valuation Hypothesis
Our model price is $28.42, 40.2% more than the current price of $20.27 (as of 8 June 2018). The model price is calculated
using a 10 year Discounted Cash Flow approach with a weighted average cost of capital (WACC) of 4.45% and a terminal
growth rate of the Free Cash Flow to the Firm of -2%. The WACC reflects the current financial structure of $5.36 billion in
market value of equity and $2.74 billion in market value of debt. The cost of debt used is 5.38% based on the estimated
company default spread and the cost of equity is 3.97% which reflects the country risk premium and the low beta of 0.25.
To reflect the additional financial risk (debt) taken on by the company we incorporate a probability of default of 30% -
obtained via Credit Rating Agencies probability of defaults for BB rated companies - into our model

Revenue

While we are in favor of the industry dynamics going forward, we apply a conservative approach in our valuation model
and project revenue growth to be negative. This way, we take into account a negative scenario for our baseline valuation
model and take into account current market sentiment on the industry. Additionally, we also take into consideration
other scenarios using our Monte Carlo valuation approach by including potential outcomes according to our assumptions
on revenue growth drivers such as wholesale chicken prices and chicken consumption demand.

Operating Margins

In 2017, operating margins stood at 10.0%, an increase of nearly 11% over the previous year (FY2016: 9.0%). The cause for
this improvement is largely due to the extensive capital investment contributing to operating efficiency and cost savings
strategy. We believe the company’s capital expenditure will further contribute to marginally improve operating margins
going forward.

Tax Rate

We use an effective tax rate of 21% (based on the recent tax reform as stated by the company).

Equity Valuation Distribution

The below distribution in figure 1 shows the substance of our buy recommendation. We run a Monte Carlo Simulation with
100,000 iterations to generate possible future scenarios according to our base assumptions. The current quoted price lies
at the very left hand side of the valuation distribution. This implies that the intrinsic value has a very large likelihood of being
over the current market price of $20.27 given the range of possibilities used in our assumptions. As a result we have a strong
level of confidence to issue a buy recommendation on the stock.

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 Figure 1: Distribution of estimated value per share

Price History (Currency: USD)

$40 10,000

$35 9,000
8,000
$30
7,000
$25 6,000
$20 5,000

$15 4,000
3,000
$10
2,000
$5 1,000
$0 0
5/12/2016 9/12/2016 1/12/2017 5/12/2017 9/12/2017 1/12/2018 5/12/2018

Volume ('000) Closing Price

Figure 2: Price Chart – Past 2 years

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Disclosures

The analysts contributing to this report do not hold any shares of this stock. The revenue and stock price forecasts are the
Gorilla’s Investment Research (GIR) consensus estimates. Additionally, the analysts contributing to this report certify that
the views expressed herein accurately reflect the analysts' personal views as to the subject securities and issuers. GIR
certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific
recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this
report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not
guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be
construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are
subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities
herein mentioned. GIR may have a position long or short in the securities mentioned and buy or sell the securities from
time to time. GIR uses the following rating system for the securities it covers which results from a proprietary quantitative
model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock
over the next 1 to 24 months. The model assigns each stock a rank from 1 through 5. GIR Rank 1 = Strong Buy. GIR Rank 2
= Buy. GIR Rank 3 = Hold. GIR Rank 4 = Sell. GIR Rank 5 = Strong Sell.