Browse > Home / Equities, Materials / Bunge: Can Food Prices Rebound?

Bunge: Can Food Prices Rebound?

Posted on: September 17, 2008 - Email Article - Printable Version

Darrell Reid

About the Author:

Commodities prices have done a complete 180 since the end of June. To reflect for a moment: oil was trading above $147/ barrel, copper was $4/ pound, and corn was trading in Chicago for almost $8/ bushel! It seemed that commodities would be the leading asset class of the year and supply concerns justified inflated prices. However, commodities were dragged down as sentiment turned on oil, culminating in a 25% drop in the iPath Commodity Index since the end of June. Many fear the commodities bull has passed and the sustained high commodities prices demand has deteriorated. Many market participants have decided to take their cash out of commodities companies. This provides the ideal opportunity for those with the conviction and tolerance for a little volatility to purchase some solid companies at a favorable price. Bunge Limited, an industrial grains processor, is the perfect example of an international leader with long-term viability whose stock price has been caught in the commodities craze.

What does Bunge actually do?

Headquartered in White Plains, NY, their operations are broken into three segments: agribusiness, fertilizer, and food products. Currently the world’s largest oilseed processor, a majority of revenues come from their agribusiness capabilities which include the purchase, storage, transportation, and sale of various grain commodities including soybeans, wheat, corn, and canola. In addition to grain processing, Bunge has made efforts to enter the alternative energy industry by making investments in a sugar-based ethanol facility, which is much more productive and cost-effective than its corn-based counterpart. Their fertilizer segment has enjoyed outstanding revenue growth in the past two years. Growth has been driven by strong global demand and tight fertilizer supplies, with their revenues reflecting global prices typically driven by companies such as Potash and Mosaic, whose share prices have skyrocketed over the past two years. Food products, their final segment, is broken into edible goods and milling products. Edible goods include vegetable oils, shortenings, margarine, and mayonnaise sold to retail markets. Milling products include corn meal, flours, and other wheat products often sold to food service companies and wheat milling companies.

Valuation

Looking at the fundamentals of this company, they are trading extremely cheaply. With a beta of 1.17x, they are a typically a stable company, but with the headline-driven nature of the markets today they are a bit more volatile. They have a solid return on equity, and with a strong current they have more than enough liquid assets to cover their interest expense.

Trailing P/E (ttm): 6.03x
Price/Book: 1.12x
EV/EBITDA (ttm): 5.27x
ROE(ttm): 20.94%
Current: 1.59
Debt/Equity: .61x
Revenue Growth (past 5 years): 22.21%

Through my discounted cash flow valuation, with projected revenue growth of 7% for the next five years, the intrinsic value of this company is around $96/ share. That’s an upside of almost 30 %, which is certainly achievable if commodities prices were able to rebound even moderately over the next 5 years. Other companies, such as Archer-Daniels Midland and Cargill, are fantastic companies who have similar business structures that have enjoyed similar growth and returns. I’m bullish on this sector due to the long term global trends of the soybean trade and the consumption trends experienced by emerging nations over the past ten years independent of their infrastructure growth. In late June, they announced their acquisition of Corn Products International, a high margin business with strong cash flows that would perfectly complement Bunge’s product portfolio.

The acquisition

Corn Products International offers sweeteners, starches, and co-products in over 60 countries. They are the world’s largest producer of dextrose, and U.S.’s leading producer of high fructose corn syrup, most easily found in your common soft drink. This acquisition provides a broader product portfolio with the introduction of higher margin products, along with an improved international presence including leading market capacity of corn products in South America, Mexico, and Canada. Due to similar business processes, it is projected they will save $100-$120M in logistical and technical synergies. This will also be a good chance to strengthen their balance sheet. Corn Products had cash flows of $258M in 2007 compared to Bunge’s negative cash flows.

The deal itself is a stock-for-stock transaction initially valued at $4.8 Billion, including the assumption of $414M of debt. Corn Products International shareholders will receive a minimum of .4207 and a maximum of .5142 of Bunge per common share. Its share price is currently trading near $75, indicating a range of $31.55 to $38.56 per share.

Strong track record

1997-1999: Ceval- Established dominant presence in Brazilian oilseed market
2000-2003: Cereol- Created leading agribusiness and food company
2003-2007: Santa Juliana and Kama Foods- Establish complimentary sugar value chain and a leading position in the edible oils market of Poland

The Market

Now, to take a broader perspective and look at the environment Bunge intends to operate it in, you must look at soybeans. The current soybean market is fundamentally set for South America to take over. It has often been the U.S who supplied grains, corn, soybeans and other grains to the world, but the most recent USDA report indicated the growth in demand of soybeans will be almost entirely captured by South America. The U.S will struggle to stay competitive, and South America will supply the growing appetite of the global population. Similar to how many believe ethanol is a key reason corn prices have risen, the same goes for soybeans and biodiesel. The only difference is that it’s actually true for soybeans. Biodiesel accounts for nearly 20% of soybean oil production compared to 13% in 2007. This has a direct affect on the availability of soy-based products, especially in the U.S. As the U.S. is forced to charge higher prices, South America will become the favorable supplier simply because they don’t have the same biodiesel demand chipping away at their available soybean oil supplies. South American farmers will be more competitive in the global market, satisfying all growth in the next ten years in the global soybean market.

Conclusion

All-in-all sentiment has turned against commodities for now as oil, copper and many more have slid from their all-time highs. The question now is this the reversal of a long term trend, or a market-driven behavioral reaction which could very likely turn just as easily? This is the supreme environment to purchase a market leader whose P/E has fallen from 16x in July to just over 6x earnings now. This is the best time to buy, don’t let headlines deter you from ignoring the fundamentals.

-Darrell Reid

Disclosure: The author owns a long position in BG.

Share or Bookmark This Post: