BB&T Capital Comments On Chicken Industry Concerns (TSN, SFD)

Estimated industry losses have moderated some recently, due to an improvement in breast meat pricing, BB&T Capital reports. “We do not believe that demand has ticked up materially, but rather, that lower slaughter and weight reductions have started to positively impact the market,” BB&T Capital writes. “While breeder flock data is trending in the right direction and is now down yr/yr, eggs set are still even with a year ago. We have heard of a number of entities instituting supply cutbacks, but are concerned about the magnitude of these reductions. Pilgrim's Pride

CEO, Bill Lovette, recently suggested at an industry conference that double-digit price increases may be required to return to favorable margins. As we have previously hypothesized, the supply reduction this year may be slower than anticipated.” BB&T Capital also said that it has recently become much more bullish on Smithfield Foods Inc. (

) and Tyson Foods Inc. (

), “due to our belief that margins are largely sustainable into FY'12 due to solid internal improvements, tight supply, and improving export demand trends.” “Further, as it relates to TSN, we believe a slow improvement—but improvement nonetheless—in chicken fundamentals will favorably impact the company,” BB&T Capital adds. “TSN has done considerable work to restructure its chicken operations, and we expect that it will be able to take advantage of competitor cuts, as well as realize a positive operating margin, even given high-priced feed.” Pilgrim's Pride currently trades at $7.65; Smithfield Foods trades at $24.44; and Tyson Foods trades at $19.82.