JBS Walks Away From Its Proposal to Buy Pilgrim’s Pride; We Recommend Buying Shares on Weakness

After the market’s close, JBS announced it has withdrawn its proposal to acquire the 20% of Pilgrim’s Pride shares that it does not currently own, as it was unable to agree on terms with the special committee formed by Pilgrim’s board of directors. As we outlined in our Feb. 6 note, the committee indicated JBS’ initial and subsequent bids of $26.50 and $28.50 per share, respectively, were inadequate. We agree with this assessment, as we think our $34 per share fair value estimate appropriately reflects Pilgrim’s intrinsic value, which is underpinned by our long-term expectations for 2%-3% annual sales growth and 7%-8% operating margins. Demand for chicken (85% of sales) should remain strong, which is benefitting from consumers’ shift away from processed meat and red meat (beef and pork), which have been linked to various cancers, per the World Health Organization. With the stock trading down a midteen percentage in after-hours trading, the shares now sell at a 30% discount to our valuation, which we view as a compelling opportunity to build positions.