Is Pilgrim's Pride a Buffett Stock?

Before you go, we thought you'd like these...
Before you go close icon

As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy Pilgrim's Pride (NYS: PPC) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Pilgrim's Pride meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Pilgrim's Pride's earnings and free cash flow history.

   

Pilgrim's Pride has had some difficulty maintaining consistent over the past five years, though they seem to be improving over the past couple of years.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity

Return on Equity (LTM)

Return on Equity (5-Year Average)

Pilgrim's Pride183%(16%)(26%)
Tyson Foods (NYS: TSN) 43%17%2%
Smithfield Foods (NYS: SFD) 60%17%4%
Hormel (NYS: HRL) 23%19%16%

Source: Capital IQ, a division of Standard & Poor's.

Pilgrim's Pride generates a negative return on equity while employing significant debt.

3. Management
CEO Bill Lovette has been at the job since January. Before that, he has at Case Foods and Tyson for 27 years.

4. Business
Chicken isn't particularly susceptible to wholesale technological disruption.

The Foolish conclusion
Whether or not Buffett would buy shares of Pilgrim's Pride, we've learned that, while the company operates in a straightforward industry, it doesn't exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and tenured management.

If you'd like to stay up to speed on the top news and analysis on Pilgrim's Pride or any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter at@TMFDada. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners