970820 S&P Revises Pilgrim's Pride Outlook
August 6, 1997
Standard & Poor's has revised its outlook on Pilgrim's Pride Corp. to stable from negative reflecting gradual improvement in the company's operating results largely due to lower feed costs company-wide, and higher selling prices in the company's Mexican operations.
At the same time, Standard & Poor's has affirmed its single-'B'-plus corporate credit rating and single-'B'-minus subordinated debt rating on the company.
About $100 million of rated debt is outstanding.
The ratings reflect Pilgrim's relatively weak financial profile, offset by the company's position as the forth largest player in the competitive, commodity-based, U.S. poultry industry, which is dominated by larger and financially stronger companies.
The company is also one of the two largest chicken processors in Mexico. Pilgrim's has demonstrated an ability to steadily move its product mix towards more value-added products, a key factor in mitigating business risk.
Value-added prepared foods now account for about 45% of U.S. sales, up from about 28% in 1990.
The company, and the poultry industry in general, were negatively impacted by record high feed costs in 1996. However, this was partially offset by price increases, both in the U.S. and Mexico, and the positive impact of increased sales of value-added products by the company.
Pilgrim's has made significant investments in the Mexican chicken market and sales in Mexico now account for about 20% of total revenues.
This market holds significant earnings potential for the company, but the volatility of that market, as evidenced by the December 1994 Peso devaluation, is a rating concern.
Standard & Poor's also expects the company to continue to grow through acquisitions which could slow improvements in the company's financial profile.
Pilgrim's profitability measures, while weak at the bottom of the cycles associated with the chicken industry and strong at the peaks, have over the life of the average cycle been in line with the rating category.
Over the last five years, operating margins have averaged in the 7% range and earnings before interest, taxes, depreciation and amortization (EBITDA) interest coverage averaged in the mid-two times (x) range.
Ratios have improved materially over the last nine months due to lower feed costs company-wide and higher selling prices in the company's Mexican operation.
For the nine month period ended June 30, 1997, the operating margin was about 6.8%, up from 4.8% for the same period of the prior year and EBITDA interest coverage was in the mid-3x times area, up from the mid-2x area for the same period of the prior year.
OUTLOOK: Stable.
The outlook reflects Standard & Poor's expectations that the company will retain its solid market position, continue to pursue a prudent acquisition strategy, and maintain a financial profile in line with the current rating.
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