Chicken Wars, Who to Play - Analyst Blog

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Over the past few months there have been talks of a significant consolidation within the Food-Meat Products Industry; specifically, the attempted acquisition of The Hillshire Brands Co ( HSH ) by both Pilgrim's Pride Corp ( PPC ), and Tyson Foods ( TSN ). Hillshire Brands is best known for their Jimmy Dean sausages, Ball Park hot dogs, and Sara Lee brands.

Offers have been going back and forth for the past few months, yet it now appears as though Pilgrim's Pride will have the winning bid. Currently, Pilgrim's bid is rumored to be worth about $55 per share (total value $6.8 billion), which tops the bid from a week ago by Tyson ($50 per share, with an estimated total value of $6.2 billion). While Pilgrim's Pride is smaller than Tyson, in terms of market capitalization ($6.7 billion vs. $15 billion), Pilgrims has JBS, a Brazilian meatpacking behemoth as a solid backer of the purchase (JBS owns PPC). Ironically, JBS had previously attempted to purchase Hillshire three years ago, but was not successful.

Possible Problem and Benefit

There is a hold up with the potential deal, and it is Pinnacle Foods (PF). Last month Hillshire announced a deal worth $4.3 billion to acquire Pinnacle, which surprised both Tyson and Pilgrim's Pride. It is rumored that Hillshire is expected to announce that it plans on speaking with both suitors regarding their bids, which could halt the pending deal between Pinnacle and Hillshire.

The purchase of Hillshire by either Pilgrim's Pride or Tyson would make them the industry leader in chicken production, and would increase their margins in other categories as well; desserts, and lunch meats to name a few. These non-chicken types of foods are much more profitable than fresh meat where margins are much tighter. The purchase would also improve the winning bidder's economy of scale with their customers and shelf space.

Who to Watch

Overall, the Food-Meat Products Industry carries a Zacks Industry Rank of 3 out of 260 total industries, which indicates a positive sustained momentum in the industry. Specifically, the industry has seen a positive 22% increase in analyst revisions as a whole.

Pilgrim's Pride ( PPC ) a Zacks Rank #1 (Strong Buy), one of the largest chicken companies in the US, Mexico, and Puerto Rico. In the past sixty days, earnings estimates has risen from $0.49 to $0.61 for Q2 2014, and has also risen for FY 14, from $1.55 to $1.92. Moreover, this company has a strong track record of beating earnings, and has a four quarter average positive earnings surprise of 16.93%. Pilgrim's Pride reports second quarter earnings on July 30.

The Hillshire Brands Company ( HSH ), a Zacks Rank #3 (Hold), manufactures and markets food solutions for the retail and foodservice markets. Over the past sixty days, earnings estimates have slightly risen for FY 14 from $1.72 to $1.74. It will be interesting to see if an all-out bidding war commences with the two rivals attempting to out-bid the other. This would cause HSH's price to continue to rise. Since the beginning of May, HSH's stock price has risen just over 50% (from $35.59 on May 1 to the COB June 2, $53.57). Hillshire reports their next earnings on August 14.

Tyson Foods ( TSN ), a Zacks Rank #3 (Hold), is the world's largest fully-integrated producer, processor, and marketer of chicken and poultry-based food products. Like PPC, the acquisition for Tyson would bring about bigger margins, better economies of scale, and a more diverse product portfolio. Unlike HSH, or PPC, Tyson's estimates have declined over the past 60 days, going from $0.82 to $0.81 for Q2, and a decline from $2.99 to $2.96 for FY 14. These estimates could easily change if Tyson decides to increase their offer to Hillshire. Tyson reports their next earnings on August 4.

Another Company to Consider in the Industry

Sanderson Farms Inc. ( SAFM ), a Zacks Rank #1 (Strong Buy), is a fully-integrated poultry processing company engaged in the production, processing, marketing, and distribution of fresh and frozen chicken products. While the company is not in discussions for Hillshire, they are a company to watch closely within the industry. Over the past sixty days, analysts have been significantly adjusting their earnings estimates; Q2 estimates have risen from $2.22 to $3.01, as well as FY 14 estimates, rising from $6.48 to $8.58. These are very significant upgrades, and yet the company has a history of beating those estimates; posting a four quarter average positive earnings surprise of 15.01%. Sanderson Farms next earnings report is on August 26.

Bottom Line

The Food-Meats Products industry is in the midst of consolidation, and the big players are all inline to play. This makes for an interesting next couple of weeks, to see the final outcome of the bidding war. Currently, it appears as though Pilgrim's Pride has the inside track, but we know things can change in an instant (and it is rumored that Tyson will increase their offer). So if you are inclined to play the Food-Meats Products Industry, Pilgrim's Pride, and Sanderson Farms are the stocks with the most upside.

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TYSON FOODS A (TSN): Free Stock Analysis Report

HILLSHIRE BRAND (HSH): Free Stock Analysis Report

PILGRIMS PRIDE (PPC): Free Stock Analysis Report

SANDERSON FARMS (SAFM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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