The Pride and the Shame: Chicken-Pork Processor Gets Salamied (PPC, DE)

Company’s President and CEO cashes out

one day after stock sets all-time high!

The Holy One, Blessed Be He, has afforded us a trade today that capitalizes on some excellent pricing features – and could deliver 2900% on a rather modest move in the underlying…

So let’s at it!

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Colorado’s Pilgrim’s Pride (NYSE:PPC) was Wall Street’s flavor of the day while news of the Avian Flu was spreading, and the foul and senseless slaughter of the country’s fowl gained speed.

But it never takes long for these things to get overdone – bar-b-charred, even – and PPC is no exception.

We’re going to examine the best way to cook up Pilgrim’s Pride (and add a little seasoning while we’re at it), but first we have a trade to close.

Nothing Runs up Profits Like a Deere

We’re shutting down our Deere (NYSE:DE) initiative today.  All her details can be found HERE.

To sum, we’re now in possession of two short DE 330 CALLs that expire next Friday and a credit of $24.08.

The CALLs sell for $11.35 each, and we’re recommending you repurchase them now.

Yes, we could hold for a better price – who knows? – they might even expire worthless!

But they also may not.

So buy them back (please) and exit with $1.38 NET on an initial expenditure of $1.75.

And that’s a dandy 78%.

It’s Pilgrim’s Pride, Daddy-o…

Okee-dokee!

Pilgrim’s Pride has profited abundantly from the reduced supply/higher inflation dynamic of the last year, thus far avoiding any of the aforementioned Avian bird infection.

That said, a number of former PPC execs were recently indicted in a price-fixing scandal that will most certainly reduce the company’s cock-a-doodle-do.

In fact, the shares already appear to be losing some of their honey-garlic.

First, Some Fundamentals

But before we get to the tell-all chart, consider the following –

• The stock carries an expansive earnings multiple of 35.28 – and it’s entirely undeserved, we say. The proof is in the forward P/E, which stands at just 9.70, according to consensus.  That essentially means the stock’s price has to be cut by nearly three quarters – or earnings have to almost quadruple over the next year – to align with Wall Street’s prognostics.

• Dividend Yield is NIL,
• Price to Book is 2.66, and
• Debt/Equity is (too high) at 1.23.
• Moreover, EPS FELL this year by 67.00% (!), and
• Are expected to DECLINE a further 5.35% in the coming twelve months, according to consensus.
• Just for comparison sake, EPS over the LAST FIVE YEARS have declined on average by 40.70%.  And that’s outright pathetic.
• Adding insult to injury, the company’s new President and CEO doesn’t want his stock!  In the last month he unloaded a third of his holdings for roughly $7.5 million – and a huge bulk was released just five sessions back, directly after the stock hit an all-time high.

Go figure…

Then take a peek at the chart –

This is the daily PPC paste-up for the last six months.

And technically it offers the following –

1. As of last Friday, RSI is sub-waterline bearish (in green), and
2. MACD has rolled over.  Taken together, the two indicate the bears are gaining control.  When MACD moves sub-waterline (later this week?), expect a torrent of technical selling.
3. Friday’s price action also saw a break below a three-month rising trendline (in red), a development that likely signals the end of the latest, overdone 72% rise.
4. The shares gapped higher on earnings in late April (in blue), a move that has yet to be filled, and
5. Which coincides perfectly with the longer-term moving average at $27.  It’s to that level we see the shares ultimately declining.
6. Note, too, the timing of President and CEO Fabio Sandri’s sale of stock (in purple).  As the outfit’s former Chief Financial Officer he no doubt has a sense of the operation’s beak and feathers.

Our trade doesn’t require all that downside to maximize winnings, though.  A relatively modest move will deliver the full brood of 2900%.

Check it out –

A Jew and His Money recommends you consider selling the PPC July 15^th 29/32 CALL spread* for a credit of $1.20 (2.15/0.95) and buying the PPC July 15^th 31/28 PUT spread** for $1.30 (1.80/0.50).  Total debit on the affair is $0.10.

[*Sell the 29 CALL and buy the 32 CALL.  **Buy the 31 PUT and sell the 28 PUT.]

Rationale: we’re looking at a NET $2.90 take from a $0.10 investment, and that makes for a cool 2900% if we’re right.

Breakeven on the trade is $29.90, just 1.6% below the current price.

After that, the cash runs like a chicken with its head cut off.

Sorry…

Couldn’t help ourselves.

May the Holy One be praised!

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew