BRF SA Shifting Gears As It Contemplates A Merger With Marfrig

As I’ve written extensively in the past, BRF SA (BRFS) management has a lot on its plate trying to turn around this large Brazil-based poultry and processed food company. After years of ill-advised (or at least unfocused) M&A and scattershot business plans carried out by prior management teams, BRF found itself saddled with debt and an inefficient operating structure, leading to the entry of Pedro Parente and a completely new management team.

While there had been some signs of progress with the turnaround plan, and the outbreak of African Swine Fever in China has been a net positive for Brazilian protein companies, management is now considering a sharp change in strategy by entering into merger negotiations with Marfrig (OTCPK:MRRTY).

On balance, I’m not sure the advantages of a merger with Marfrig outweigh the challenges, but it does at least kick the can down the road in terms of showing results from the turnaround. Moreover, there aren’t going to be too many opportunities like this for BRF. While I continue to believe that BRF could be worth substantially more than its current share price down the road, I’m not sold on the idea that adding more complexity is the best way to build value.

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BRF SA Shifting Gears As It Contemplates A Merger With Marfrig

Slow Progress At BRF SA, But ASF Is Providing A Boost

BRF SA’s (BRFS) turnaround process is going to take years to complete, but management has made some progress already. Helping matters, a potentially severe outbreak of African Swine Fever (or ASF) in China has boosted protein stocks (BRF included) in anticipation of higher protein imports from that country and less demand for grain in Brazil.

The impact of the ASF outbreak is unlikely to provide a permanent boost to BRF, but it should boost revenue, profits, and cash flow at a time when the company could really use the boost. The shares look more fully-valued on a near-term basis, but I maintain my longer-term outlook that a successful turnaround could drive a meaningfully higher price for more patient investors.

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Slow Progress At BRF SA, But ASF Is Providing A Boost

BRF's Third Quarter Had A Few Positives

Brazil’s BRF SA (BRFS) is only just starting its turnaround process, so investors shouldn’t expect quick fixes or huge improvements in financial results right away. Likewise, I wouldn’t get too concerned about near-term challenges like a currency-driven jump in the debt ratio. Importantly, the two key profit centers (Brazil and the halal business) both had some positive news and results should improve in the coming quarters.

I continue to believe that fair value for BRF shares today is in the $6’s, but with upside into the double-digits in a couple of years if and when the company executes on its turnaround strategy. Success is far from guaranteed, though, and investors need to aware not only of the company-specific execution risks, but also the commodity and currency risks that impact this business.

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BRF's Third Quarter Had A Few Positives

At BRF SA, The Flesh Is Still Weak And Investor Spirits Aren't So Willing

It has gone from bad to worse at BRF SA (BRFS), as frequently happens when a company reaches a "critical mass" of mismanagement and poor decision-making. BRF's big miss with fourth quarter results put the cap on what was already a pretty poor 2017, and though BRF has a new management team and a new plan, major investors seem to want yet more change.

I've always thought it was going to take time and patience (a lot of patience…) for BRF to develop, and I don't believe the company is unfixable. That said, there's a lot of work to be done in both the domestic and international operations and plenty of volatility inherent in a commodity-driven business with significant international emerging market exposure. I believe mid-to-high single-digit revenue growth is still possible and, coupled with mid-to-high single-digit FCF margins, can still support a $10-plus fair value from here, but this is a high-risk call that is going to need a couple of years to really play out.

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At BRF SA, The Flesh Is Still Weak And Investor Spirits Aren't So Willing

BRF Has A Lot Of Work Ahead To Rebuild Credibility

The nearly 25% drop in BRF's (BRFS) share price over the past year is hardly the worst part of the story; I think you could argue that the market has been relatively merciful all things considered. While I've often noted (and lamented) BRF's above-average cyclicality, I thought management had a strategy in place that would see ongoing global growth in processed/packaged food lead to more sustainable results. I was wrong on many accounts, as the company's strategy is still unclear and inconsistently managed.

I do still believe BRF has a lot of potential, but “potential” is a word that has brought many investors to sorrow. Results should improve in the second half of the year, but management has a lot left on the “to do” list – including showing that they can manage the Brazilian business to generate growth and margins and that they can make the international operations less dependent upon commodity products. There is still upside into the high teens, but BRF management has a lot of work to do to rebuild the trust that would justify such a fair value today.

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BRF Has A Lot Of Work Ahead To Rebuild Credibility

For BRF, There's Opportunity Amid The Adversity

When I last wrote about Brazilian food company BRF (NYSE:BRFS), I was concerned about the likelihood that the company's financial results were entering a rough period - squeezed between Brazil's weak domestic market, challenges in many export markets and spiking input prices. At the same time, BRF is seeing more competition at home and trying to navigate a tricky dual-brand strategy that could lead to market share and revenue pressures.

Those concerns have proven valid, but I'm surprised at the extent to which the market has been willing to look past it and toward the significant long-term opportunity BRF offers - I thought the shares were undervalued below $17 back in May, but I didn't expect a 24% move in the ADRs, nor the 13% move in the underlying local shares. Perhaps some of this is due to buyout rumors, particularly as Marfrig and JBS (OTCQX:JBSAY) haven't been great performers.

In any case, I still like BRF and this is still a stock that I hope to own for a long time. With a fair value in the $18-$19 range, but significant growth opportunities yet to be tapped, I think the shares hold some appeal but investors concerned about the risks and enhanced volatility of a Brazilian company may want a bigger discount before taking the plunge.

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For BRF, There's Opportunity Amid The Adversity

Seeking Alpha: BRF S.A. Not So Appetizing Yet For Nervous Stomachs

When I last wrote about BRF S.A. (NYSE:BRFS), I warned that investors were likely in for a bout of elevated volatility - a prediction that, when made in reference to almost any Brazilian company, is a little like predicting that jumping into the ocean will make you wet. The shares have indeed jumped around since that last article and the shares have underperformed not only the Bovespa, but other Brazilian food players like Marfrig (OTCPK:MRRTY), JBS (OTCQX:JBSAY), and Minerva (OTCQX:MRVSY).

Whether BRF shares are a good idea now rests in large part on your time horizon. The company is doing a lot of smart things - relaunching a complementary value-priced brand in Brazil, prioritizing higher-margin processed/packaged foods, and using M&A to acquire local production and distribution to capture more value from international sales. Along the way, though, there have been frequent management shake-ups and there is still a lot of volatility in the business model due to commodity inputs, protein prices, currency, and so on.

I do believe that BRF can eventually achieve its goals of becoming more like Hormel (NYSE:HRL) or Nestle (OTCPK:NSRGY) and achieving EBITDA margins in the high teens or even 20%, and I do like the company's efforts to improve ROIC in recent years. That said, getting volume growth going again is a clear must-do and investors can certainly be forgiven for thinking that BRF is too risky and too volatile to mess with today. I believe the fair value for the ADRs is still above $17, but it's going to take a healthier, or at least more stable, environment in Brazil for these shares to do meaningfully better.

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BRF S.A. Not So Appetizing Yet For Nervous Stomachs

Seeking Alpha: BRF Sticking To Its Plan In A Challenging Market

The ever-volatile, and generally bad, economic situation in Brazil isn't doing any favors for BRF S.A. (NYSE:BRFS), and neither is increasing competition. Worries about market share and a potential price war in Brazil cast an already tough third quarter in an even more negative light, helping accelerate a nearly 20% decline in the Brazilian shares since my August update and a nearly 30% decline in the ADRs.

As I have warned in prior pieces, BRF shares and ADRs have always been more volatile than global integrated food companies like Nestle (OTCPK:NSRGY) and General Mills (NYSE:GIS) and I expect that to be the case for the foreseeable future. Nevertheless, I think fears of a price war are overdone and I believe BRF's management continues to execute on a very sound plan to position the company as a truly global protein and processed foods player.

Absent a more robust recovery in Brazil (which nobody seems to expect right now), it's going to likely take a couple of strong quarters for BRF to get back into investors' good graces. Unfortunately, growing poultry export competition from U.S. producers, higher grain prices, and a tougher domestic market could make that a more prolonged process than investors would like to see. I still believe BRF shares are an attractive long-term holding, and that this is the sort of pullback that investors can/should use to build positions, but the next quarter or two could offer a level of volatility that nervous investors won't like.

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BRF Sticking To Its Plan In A Challenging Market

Seeking Alpha: BRF's Strong Exports Offset A Tough Brazilian Market

There are times when boring businesses have their advantages, and this is one of those times in Brazil. BRF SA (NYSE:BRFS) local shares have outperformed the Bovespa by about 35% over the past year as this core consumer business has held up better than many during Brazil's difficult economic times. The weakness of the Brazilian real has hurt the performance of the ADRs (down about 18% over the past year), but I continue to believe that BRF is on its way toward establishing itself as a global packaged food company with a focus on emerging market consumption growth.

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BRF's Strong Exports Offset A Tough Brazilian Market

Seeking Alpha: BRF Tastes Better Than It Looks

The real reason to own Brazilian poultry and processed food giant BRF (NYSE:BRFS) is for the company's long-term leverage to a shift away from commodity protein toward processed food (think more Hormel (NYSE:HRL)/Oscar Mayer and less Tyson (NYSE:TSN)/Pilgrim's Pride (NASDAQ:PPC)) and its growing emerging market presence out of Brazil. That said, the market is still a quarter-to-quarter weighing machine and BRF posted a confusing set of first quarter results that were better than they may first seem.

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BRF Tastes Better Than It Looks

Seeking Alpha: These Are Tougher Times For Brazil, But BRF Still Offers A Bright Future

BRF (NYSE:BRFS) is certainly not the only quality Brazilian company to see its ADRs trading well below its highs, but I continue to believe this is a good stock for investors looking for long-term exposure to emerging market consumers. BRF is looking at more challenging domestic conditions this year, but the company continues to pursue a vision of gradual transition from its reliance on commodity proteins and becoming a global packaged/branded food company.

When I last wrote about BRF, I thought the shares had gotten a little pricey and that investors could wait for what I thought was an inevitable pullback in Brazilian stocks. That pullback has happened, taking the ADRs down more than 20%. It seems early to blow the "all clear" on Brazil, but I do think investors can start to think about initiating positions in this well-run food company.

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These Are Tougher Times For Brazil, But BRF Still Offers A Bright Future

Seeking Alpha: BRF's Operational Improvements Shining Through

Brazil's largest food company, BRF SA (NYSE:BRFS), continues to show progress with its self-improvement efforts. Although economic stress on Brazilian consumers has been leading to some trading-down in buying patterns, BRF has offset this with a more profitable SKU mix and an increased focus on operating efficiency. Despite an unexpected change in the company's leadership, the company looks on track with previously announced plans to shift more emphasis to higher-margin processed/packaged products and to prioritize margin and cash flow efficiency.

The biggest problem with BRF shares, apart from the volatility of the Brazilian economic and political environment, is valuation. I do believe that BRF has a plan that can lead the company into the ranks of the multinational packaged food giants, but the shares reflect a lot of optimism. I'm in no rush to sell just because of valuation, but new investors may find it wiser to wait for one of the seemingly inevitable corrections in the Brazilian stock market before stepping to the plate.

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BRF's Operational Improvements Shining Through

Seeking Alpha: BRF SA Doing A Lot More With Less

Brazil's leading food producer, BRF SA (NYSE:BRFS) (also known as Brasil Foods), tends to be quite a bit more volatile than international peers like Nestle (OTCPK:NSRGY) and Unilever (NYSE:UL) or U.S.-centric companies like Hormel (NYSE:HRL). In the last quarter that volatility has worked in investors' favor, with a better than 13% gain that brought the year-to-date gain up above 20%.

What should be of more interest to long-term investors is the significant progress the company is making with its plans to streamline its operations and prioritize margins over volume. I don't expect BRF to continue delivering 10% beats at the EBITDA line, but the company's strong execution with this plan certainly helps management build credibility. These shares aren't exceptionally cheap right now, but I'm in no hurry to sell what I believe is one of the better-run Brazilian companies and one with significant growth potential for the long term.

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BRF SA Doing A Lot More With Less

Seeking Alpha: BRF Still In The Early Stages Of A Major Transformation

It is going to take time to realize, but the management of BRF SA (BRFS), or "Brasil Foods", has a bold vision for this already-large food company. The basic story at BRF has not changed all that much - the company wants to transition from a commodity producer of animal proteins to a diversified branded global food company - but management has gotten more serious about product development, go-to-market strategies, and global distribution. With a strong position in the growing Brazilian market, as well as footholds in the Middle East and Asia, a potential double-digit annual return makes this still a stock worth following closely.

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BRF Still In The Early Stages Of A Major Transformation

Investopedia: Tyson Foods Continues To Leverage Strong Margins In Proteins

As many packaged food companies start to stumble and sputter, Tyson Foods (NYSE:TSN) appears to be picking up steam. With generally solid volume and pricing trends across the business and lower feed costs boosting margins, Tyson is starting to draw the “it's different this time” bullish arguments. It's hard to argue with a stock that has nearly doubled over the past year, and management's guidance sounds pretty solid, but investors buying today need to hope for strong grain harvests and restrained competition going forward.

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Investopedia: Smithfield Gets Its Deal, But From A Surprising Bidder

Investors had been agitating for Smithfield (NYSE:SFD) management to “do something” to increase the value of their shares, and their wishes were answered in spades on Wednesday. The largest pork producer in the U.S. announced that it had accepted a bid to be acquired by China's Shanghui International in an all-cash deal that awards a pretty hefty multiple to this protein producer.

The Deal To Be...
If the deal goes through as announced, Smithfield investors will receive $34 in cash for each share they own. That works out to a 31% premium relative to Tuesday's close and just barely less than the all-time high for the stock.

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Seeking Alpha: Brasil Foods - An Emerging Titan With Hefy Expectations

Being a titan always seems to come with strings attached - Atlas had to bear the weight of the world, Prometheus ended up chained to a rock, and Brasil Foods (BRFS) carries the burden of sky-high expectations. While it is indeed a good thing to be the second-largest food company in Brazil and one of the ten largest in the world, Brasil Foods' current valuation practically demands excellence if shareholders are going to see market-beating returns from this point.

Disappointing Q4 Results Highlight A Key Vulnerability
On the whole, Brasil Foods had a pretty mixed fourth quarter. Revenue did rise 11%, but higher production costs and salaries pulled EBTIDA down 4% compared to the prior year.


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Brasil Foods - An Emerging Titan With Hefty Expectations

Investopedia: Zhongpin Could Be Hog Heaven For Investors

Although the scandals surrounding small Chinese stocks in 2010 and 2011 never crept as high as the huge companies like Petrochina (NYSE:PTR) or Lenovo (OTCBB:LNVGY.PK), Zhongpin (Nasdaq:HOGS) did come in for closer scrutiny and doubt. Although history suggests investors can never completely trust any company, hog producer Zhongpin may yet be a sound strategy for benefiting from improving standards of living in the PRC.

The Number Four Player in the Protein of Choice  
Zhongpin is the fourth-largest pork processor/packer in China, but holds less than 1% share of the hog slaughter market and the larger players will scarcely familiar to most readers in North America (Shanghui, China Yurun, and People's Food). With the top five producers holding less than 10% share, the Chinese market is a far cry from the highly concentrated U.S. market that is largely dominated by companies like Tyson (NYSE:TSN), Smithfield (Nasdaq:SFD), Seaboard (AMEX:SEB), Swift (owned by Brazil's JBS) and Cargill, where the top four companies have over 60% of the market.

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Investopedia: Is There Still Time To Play The Rebound In Sanderson Farms?

Sanderson Farms (Nasdaq:SAFM) may be one of the best-run protein producers in North America, but that is not worth much to long-term investors, as big institutions run hot and cold on the shares based on the cyclical moves in poultry profitability. With the poultry market perhaps bottoming out and Sanderson's stock already off its lows, is there still time to play the eventual rebound in this business?


A Tough Second Quarter 
Sanderson definitely had a tough fiscal second quarter, but it could have been quite a bit worse. Revenue fell 2% this quarter (and rose almost 12% from the prior quarter) as increased production volume was offset by lower pricing. Although whole-chicken prices rose and leg-quarter prices increased on resumed Russian imports, boneless breast prices have been quite weak, and wing prices have plummeted.

At the same time, feed prices continue to march higher. Sanderson reported that feed costs rose 41%, and that pretty much corroborates what has been going on in the grain futures markets (chicken feed is usually about two-thirds corn and one-quarter soybean meal). Unlike Tyson (NYSE:TSN) and Pilgrim's Pride (NYSE:PPC), though, Sanderson Farms does not hedge grain exposure to a large degree.

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