PPC | Pilgrim's Pride (PPC) Can't Win For Losing

Pilgrim's Pride Corporation (NYSE: PPC ) is in a bit of a pickle. The more it beefs up its top line, the bigger its loss becomes. Or, the path back to profitability involves reeling in its revenues. Needless to say, it's a bitter Catch-22 for the company as well as PPC investors.

At the heart of the conundrum is, of course, swelling crop and feed prices. Primarily a chicken product provider, Pilgrim's Pride is shelling out more to feed or buy its birds.

It's not just a question of higher input prices for PPC though. Weak demand for chicken has hurt the company's pricing power as well as sales volume... a drastic turnaround from 2010's record-breaking year for the industry. And that may well be the heart of the problem for Pilgrim's Pride Corporation as well as other chicken producers now. Where there's lots of money to be made, competition soon follows. Eyeing a strong 2009 and even stronger 2010, a ramp-up in chicken production this year translated into a glut, and ultimately drove chicken prices to the point of the business not being profitable any longer.

In other words, Pilgrim's Pride's problem isn't just a matter of rising expenses; the top line is under fire as well.

In an ironic twist, some experts believe it will take a production cut of 5% or more for PPC and its peers to get back to positive gross margins again. That may not generate more sales, but it will at least let allow current sales to be fruitful ones. Other industry forecasters still have doubts that a scale-down of that size would do any good. These pros believe a 9% decline in production will need to be seen make the chicken business viable again.

Don't look for Pilgrim's Pride Corporation to get back in the black anytime soon though. After dipping deep into the red ink for the past two quarters (losing $128 million on $1.9 billion in sales for Q2), a lack of relief - in terms of oversupply and high feed costs - in the meantime means nothing significant could possibly be improving for PPC in the current quarter.

Some outlooks suggest the underlying dynamic could persist for a year or more, which means PPC could be weighed down until late 2012. While most dire projections tend not to pan out for as long as expected, nor do they cut as deep as expected, even a chicken market that's under fire for half that time could make Pilgrim's Pride a real turkey of an investment.