It has been a tough time for giants in the poultry industry- and to recap, no company was feeling the pain at the end of October more than Pilgrim's Pride. Despite securing another temporary line of credit to hold off the bill collectors for another month, CreditSights, an independent research firm, released a report stating that as soon as a $25.7 million interest payment due bill comes due after a 30 day grace period, bankruptcy is "highly probable." Business Week has more:As one could imagine, that report did little to help the company's sagging stock prices. On Sept. 25, Pilgrim's Pride stocks had already plunged 40 percent after the company said it may breach a loan covenant because of a significant loss in the quarter that ended Sept. 27. Current prices are at $.25 a share.When that grace period runs out, "a bankruptcy scenario now seems highly probable," according to research firm CreditSights. The firm said in a note Wednesday that though the company was able to secure a second temporary waiver, it does little good.
"Although the temporary waiver provides Pilgrim's Pride with another 30 days of life, it appears to be more illusionary than substantive," the report said.
Pilgrim's Pride spokesman Ray Atkinson said the company continues "to believe Chapter 11 is not in anyone's best interest."
It is worth mentioning the Pilgrim's Pride saga, because MarketWatch is now reporting that Tyson's poultry division is set to follow in their footsteps:
Even Moody's Investor Service downgraded Tyson's rating last Thursday, according to The International Herald Tribune.So far, Springdale, Ark.-based Tyson won't cut poultry output to put the unit on firmer ground. The business lost $91 million for the quarter ended Sept. 27.
Analysts, however, are alarmed these factors could put Tyson in danger of violating its debt-covenant credit agreement, just as Pilgrim's Pride did last month. Still, Chief Executive Richard Bond sounded confident his company could renegotiate its loan terms.
"No amendments are guaranteed in today's jittery credit market, no matter how strong management's relationship are with lenders," wrote J.P. Morgan analyst Ken Goldman, who issued a sell rating on Tyson shares Tuesday and chopped his price target to $4.
So, why isn't Tyson cutting output to stabilize losses? Blogger Tom Philpott at Grist speculates:
Normally under such conditions, giants like Tyson merely cut production: produce less chicken, and thus boost its market price. And here's the weird part: Tyson actually boosted chicken production in the latest quarter by 6 percent, thus worsening the problem.
And the company has vowed not to cut chicken production going forward. Why? Barclays Capital analyst Christopher Bledsoe thinks he has an answer: Tyson is intentionally taking losses in its chicken segment to "force other chicken processors to carry a disproportionate burden of this cycle's necessary production cuts."Translated, I think he means to say that Tyson is trying to drive its largest poultry competitor, number-one chicken producer Pilgrim's Pride, out of business. You see, while Tyson can, at least partially, offset losses in its poultry business with pork and beef profits, Pilgrim's Pride is a pure chicken company.
Thus it is extremely vulnerable to ongoing trouble in the chicken market -- and that is exactly what Tyson is creating with its policy of maintaining heightened levels of production.If Pilgrim's Pride collapses into bankruptcy, its assets will be available for fire-sale prices -- and a company like Tyson could be poised to snap them up. At any rate, the fall of its largest competitor will give Tyson more leverage to dictate prices to both farmers and consumers.
While Pilgrim's Pride picked a "restructuring executive" last week, it remains to be seen if the company can turn itself around. Some investors are already counting out both of the giants and looking to other brands. Alan Brochstein of SeekingAlpha.com is endorsing Hormel Foods:
In an environment of falling sales, plunging earnings and slashed or eliminated dividends, I think that HRL will stand out as an oasis of stability that offers potentially that which will be quite scarce: growth. For those of you concerned about the economic crisis leading to global chaos and the destruction of civilization as we know it (I ran into a bunch of these folks when I dissed gold recently in an article that not only reinforced the idea of the outsider's perspective perhaps having value but was also one of the most read and commented upon blogs I have posted), maybe the company benefits from the hoarding of canned goods. Kidding aside, I recommend that everyone set aside their fears of and negative associations with Spam and consider Hormel.
Meanwhile the Financial Times reports that Sanderson Farms is hoping to buy up some Pilgrim's Pride Assets that they are quietly trying to sell:
Pilgrim’s started the sales process earlier this year by putting its Mexican division on the block, but assets up for grabs now include North Carolina and Arkansas plants, the same sources said. Sanderson Farms is rumored to be a particularly interested bidder, said one of the bond holders and the buysider.
Who do you think will still be standing this time next year? Will Thanksgiving Sales hurt or help any of the poultry giants? Let us know in the comment section below!
Further Reading:
MarketWatch on Tyson not cutting chicken output.
The Dallas News on Pilgrim's Pride picking the restructuring executive.
Boston.com on the feared dry spell for the turkey industry.
