Source:  MEATINGPLACE.COM, 5/7/10

Even with production set to rise, the chicken industry will continue to benefit from tight supplies and rising demand, two Wall Street analysts argued a day after plans by Pilgrim's Pride to re-start three poultry plants sent protein stocks plunging.

Pilgrim's, whose shares fell 22 percent on Thursday, faces its own unique challenges that may aid its competitors, while its plans to ramp production by 10 percent won't take full effect until 2013, they said.

"Higher supply is on the way (and that's not good) but not for a while," said J.P. Morgan analyst Ken Goldman in a note to clients. But he upgraded shares of Sanderson Farms to "overweight" from "neutral" after the stock declined 7 percent Thursday and raised his earnings estimates for both Sanderson and Tyson Foods.

Pilgrim's Pride's plans to re-open its Douglas, Ga., facility and two unnamed plants will take at least nine months to affect industry pricing and margins, Goldman said.

In the meantime, chicken industry margins will draw support from tight total protein supplies, a recovery in demand, seasonal strength and fewer breeding hens being hatched, the analysts said.

Internal operational issues prevented Pilgrim's Pride, which also reported disappointing sales and a net loss on Thursday, from realizing higher chicken prices and cutout margins, said BMO Capital Markets analyst Kenneth Zaslow.

"Unhesitatingly, we believe (Pilgrim's) weak performance is company specific," Zaslow wrote in a report to clients. The company's challenges, he said, include an unfavorable product mix, low utilization rates, fixed price contracts and supply chain inefficiencies.

Goldman said recent industry announcements suggest chicken slaughter is set to rise by at least 3.6 percent over the amount produced during the past 12 months.

"This is a lot for a sensitive commodity category, and we do not downplay the longer-term impact. Nearer term, however, the effects should be limited," said Goldman, noting the first Pilgrim's plant to re-open is not slated to come on line until January 2011 and will add about 1.5 percent.

"Lately prices have withstood a 5-6 percent increase in pounds slaughtered, so another 1.5 percent is hardly devastating," Goldman wrote.

Even if 100 percent of the production came online today, total U.S. supply would still be below the level produced every year between 2005 and 2008, he said.

Goldman maintained a "neutral" rating on Tyson shares, citing the potential for beef and pork margins to feel the burden of higher input costs.

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