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Pilgrim's Pride Latest Leverage Casualty

Posted: Sep 25, 2008 15:08 PM by Eric Fox

Tickers in this Article: PPC, BZH, SFD, DTG, TSN

Pilgrim's Pride (NYSE:PPC) became the latest victim of excess leverage after the company announced that a large loss for the fourth quarter would put the company in default of its loan covenants. Pilgrim's Pride said its lenders had agreed to waive the covenant through October 28, but the exchange was still forced to halt trading temporarily in the stock.

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Blame it on the Grain
The company is one of the country's largest processors of chicken. It said the large loss was due to high feed costs, losses on hedging of grain positions and weak pricing for chicken. Some of these issues have plagued Pilgrim's Pride in previous quarters as well.

The company reported in the third fiscal quarter ending July 29, 2008, that feed costs were up $266 million from the same quarter last year. The main culprits were corn and soybean, which were up 60-80% over last year. The company also said that pricing for skinless chicken breast meat was down year over year in the quarter. (Hedging with futures can protect those who buy and sell commodities, but there is also risk. For more, read Grow Your Finances In The Grain Markets.)

Higher feed costs have plagued other meat processors as well. Last quarter, Tyson Foods (NYSE:TSN) said that grain costs in its Chicken division were up $140 million over the third quarter of 2007. Smithfield Foods (NYSE:SFD) in its earnings report at the end of August reported sharply higher feed costs because of a 39% increase in corn and a 33% increase in soybean meal over the same period last year.

Covenant Violation
The specific covenant that Pilgrim's Pride said it expected to be in violation of was the fixed charge coverage ratio. The fixed charge coverage ratio measures the ability of a company to pay its fixed charges, and is typically calculated as earning before interest and taxes relative to the fixed charges. A higher ratio means more earnings to cover these fixed charges.

The company also renegotiated covenants during the third fiscal quarter when it modified the fixed charge coverage ratio to 125% from the 150% specified in the original agreement. Pilgrim's Pride has total debt of $1.5 billion. It took on much of the debt when it purchased Gold Kist in 2007.

Other Leverage Victims
Many companies in a wide variety of industries have had to renegotiate covenants with lenders due to excessive leverage compounded by the economic slowdown. Dollar Thrifty (NYSE:DTG) announced last week that it might need to renegotiate its maximum leverage covenant. It took similar action in the previous quarter. On August 7, Beazer Homes (NYSE:BZH) negotiated an amendment to its credit facility that modified its loan covenants, and other homebuilders have concluded similar agreements.

Bottom Line
Pilgrim's Pride's troubles with excess leverage and debt have only served to exacerbate poor operating conditions due to higher input costs and weak pricing for its products.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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