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

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 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

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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http://www.investopedia.com/stock-analysis/080713/tyson-foods-continues-leverage-strong-margins-proteins-tsn-ppc-safm-sfd.aspx

Seeking Alpha: Brasil Foods A Bipolar Brazil Play

There's an old joke that goes something like this - what is a long-term investor? A short-term investor that won't admit a mistake, take a loss, and move on. I don't happen to subscribe to that point of view, but I do admit that Brasil Foods (BRFS) is not the easiest stock to own as Wall Street wavers between breathless enthusiasm for emerging markets and rank skepticism about those same markets.

Brasil Foods absolutely has real challenges today, but the long-term potential for this Brazil-based global food company is enough to keep me interested in the shares.

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Brasil Foods A Bipolar Brazil Play

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

Seeking Alpha: Can Brasil Foods Hit Some Impressive Goals?

Brazilian meat company BRF-Brasil Foods (Nasdaq: BRFS) has had a solid run already. Basically a marriage of convenience between Perdigao and Sadia prompted by hideous derivative losses at Sadia, Brasil Foods has nevertheless formed itself into an impressive Brazilian food concern with significant export prospects. Perhaps even more to the point, in a year where most Brazilian equities fared quite badly indeed, this one did fairly well. Of course, the more important consideration is whether there's money to be made yet from this name.

A Known Quantity In A Major Emerging Market
Although far from a household name in the United States, Brasil Foods is in some respects a Brazilian version of Tyson Foods (NYSE: TSN). Like Tyson, Brasil Foods operates in a variety of protein markets, including chicken, beef and pork. Unlike Tyson, and perhaps more like Hormel (NYSE: HRL) or Sara Lee (NYSE: SLE), Brasil Foods has a sizable branded business as well.

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Can Brasil Foods Hit Some Impressive Goals?

Investopedia: Tyson Already Looks Overcooked

When last I reviewed Tyson Foods (NYSE: TSN), I commented that it would be an interesting stock to buy around one times book value. As it turns out, the stock briefly touched that level and had a decent run from there. Now, though, it seems there are growing expectations of improvement in the chicken market and sustainable profitability in beef and pork; so much so that there really doesn't seem to be much upside left in these shares.


Familiar Challenges Close Out the Fiscal Year 
A lot of what went on in Tyson's fiscal fourth quarter will sound familiar. Sales growth looked impressive at nearly 13%, with very strong price growth in excess of 12% and very modest volume growth of less than 1%. Top line growth was led up an impressive 16% in beef, where prices rose almost 19%, and 14% in pork. Chicken revenue rose a more sedate 9% and prepared food revenue rose less than 4%, on a nearly 3% decline in volume.


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http://stocks.investopedia.com/stock-analysis/2011/Tyson-Already-Looks-Overcooked-TSN-PPC-SAFM-HRL-SLE-HNZ-KFT-GIS1124.aspx

Investopedia: Don't Get Piggish With Smithfield Foods

Protein stocks can be some of the most irritating stocks for an individual to consider. So much of what determines success at companies like Smithfield (NYSE:SFD), Tyson (NYSE:TSN), and Pilgrim's Pride (NYSE:PPC) is out of their control and all but impossible to predict. What's more, successful trading often demands selling when things look great and buying when things are terrible - old advice to be sure, but nevertheless still hard for many investors to follow. 

With Smithfield Foods posting its first full-year profit in a few years, and the stock up nicely relative to the S&P 500 over the last two years, investors might be wise to question whether this is a stock they want to hold for the full cycle or whether it may be time to move on to greener pastures. While protein consumption seems to be on an inexorable climb around the world, agriculture is still unpredictable and protein stocks are still tough candidates for long-term sleep-well-at-night investing.

A Good End To The Year

Smithfield Foods certainly brought home some good results for the end of its fiscal year. Revenue rose more than 7%, as Packaged Meat pushed Pork Processing to a double-digit increase and offset weaker performance in Hog Production. One potential concern comes from the volume figures - across the board volume was weak, as fresh pork volume dropped 9%, packaged meat volume fell 2%, and hog production volume fell 9%.


The full piece can be read for free at Investopedia:
http://stocks.investopedia.com/stock-analysis/2011/Dont-Get-Piggish-With-Smithfield-Foods-SFD-TSN-CORN-HOGS-OINK-SEB-HRL0620.aspx

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.

To read the full piece, please follow this link:
http://stocks.investopedia.com/stock-analysis/2011/Is-There-Still-Time-To-Play-The-Rebound-In-Sanderson-Farms-SAFM-PPC-TSN-IBA-BWLD0526.aspx

(Repost) Investopedia: Does Tyson Deserve Better?

Tyson (NYSE:TSN) is a tricky stock. Commodity food producers like Tyson almost never get the valuation that packaged food companies like Hormel (NYSE:HRL) and General Mills (NYSE:GIS) carry. Even with that being said, though, Tyson has shown itself to be relatively less volatile than other protein producers but still gets no premium for that distinction. If Tyson can somehow maintain its current levels of free cash flow production, this is a stock that value investors should seriously consider.


Very Mixed Performance for Q2
Tyson's fiscal second quarter was a real mixed bag - solid top-line performance, but not a lot of great news on profitability. Tyson reported that revenue grew about 12% in the second quarter, comfortably above the average analyst estimate. Growth was consistently positive across the board, with the company's large beef operations showing 19% revenue growth and the pork business jumping 26%. Even as a laggard, the poultry business was still up 10%.

Profits were not nearly so solid. Gross margin slid to 6.7% from 8.2% a year earlier; not a surprise, given the increase in grain, energy, packaging and other inputs. Operating income fell 12% from last year, and the operating margin compressed by 1.2%. Although operating income in the pork segment more than doubled (and margins were better than 10%), the profit in beef fell by a quarter and poultry income dropped nearly 68%.


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http://stocks.investopedia.com/stock-analysis/2011/Does-Tyson-Deserve-Better-TSN-HRL-SFD-SAFM-PPC0512.aspx

Check Out Adecoagro

It probably didn't get much attention during the week, but I noticed an interesting F-1 filing during the week. Adecoagro filed to go public, and I'd suggest anybody with an interest in the farming industry, or a desire to invest in farming operations, take a look. It's a long read, though, so I can't hope to give more than a high-level view.

Who And What It Is

Adecoagro is active in farming, cattle, dairy, sugar, and ethanol in Argentina, Brazil, and Uruguay. The company controls 287K acres, spread over 21 farms in Argentina, 15 in Brazil, and 2 in Uruguay. In addition, the company has 3 rice processing facilities, a 47K+ liter dairy operation, 2 coffee processing plants, 7 grain conditioning/storage facilities, and 2 sugar and ethanol mills in Brazil with 5.2M ton crush capacity.

A bit less than half of the company's land is suitable for crop farming, while about one-third of it is used in cattle-raising. Not surprising for a South American ag company, soybeans make up more than half of Adecoagro's crop production.

Also worth mentioning is that George Soros (or rather, a company owned and controlled by him) owns about one-third of the company.

How It's Doing

Okay, that's the quick summary of what they are. How is Adecoagro doing? A quick read of the F-1 suggests that the company might be going public more to cash in on the buzz over agriculture (and the lack of investable plays) than to exploit solid financials. The company's free cash flow production has been lousy for a years now, and the company's crop yields have been very dicey – while the company has seen a good rebound through the first nine months, 2009 and 2008 were terrible. At least the company's balance sheet is in decent shape – for an ag company, the debt-equity ratio of about two-thirds isn't bad.

All in all, Adecoagro is a company I'm going to try to pay attention to going forward. I haven't dug into the numbers enough yet, but I suspect there is ample room for better financial performance, particularly given the disappointing yields of 2009 and 2008. What's more, it will be a publicly-traded ag company easily bought and sold in the U.S. and that is quite rare.

A Shopping List

On a global basis, there are ample publicly-traded ag companies. In Latin America, there Marfrig, BrasilAgro, Cresud (Nasdaq: CRESY), SLC Agricola, and San Martinho. Of those, only Cresud is listed in the U.S., though some of these ADRs have decent volume (like Marfrig) and trading in countries like Brazil is getting easier and easier.

Of course, there other options around the world as well. China Agri-Industries, China Yurun, Mengniu, Zhongpin (Nasdaq: HOGS), Astra Agro Lestar, Golden Agri-Resources, and Indofood Agri are all worth at least a look, and there are more than a half-dozen palm oil companies of notable size. And then there are Viterra and Canada's Alliance Grain Traders – both of which are perhaps a little easier for U.S. investors to follow.

Whew... a long list to be sure, but I figure anybody who shares my near-obsessive interest in farmland investments might find it to be useful. But it's interesting to me how relatively few options there are that are listed on U.S. exchanges – beyond Bunge (NYSE: BG) and ADM (NYSE: ADM), you pretty much have to look at second-level plays like fertilizer companies (like Potash (NYSE: POT)) or seed companies (like Monsanto (NYSE: MON)).

Maybe Wait For A Pullback?
Given the big spike in food prices, and the rampant media attention that has gone with it, food is a hot space now. Consequently, investors should not expect to find all that many bargains in the space. Companies like Zhongpin and Mengniu have interesting long-term prospects, and companies like Alliance Grain would be interesting on pullbacks, but there are a lot of valuations in the space today that probably won't be sustainable. That leaves investors looking at riskier plays like Monsanto if they want bargains.

So, if you share my interest in the food and ag sector, I strongly suggest looking up Adecoagro's F-1 on Edgar. It's a good read and even if you aren't interested in the company, it can be a good resource for those wanting to learn more about the sector and South American farming in particular.

Disclosure – I own shares of Monsanto

Update - Forgot to mention ... Adecoagro is looking to raise about $400M in its IPO and will trade under the symbol "AGRO".

Smithfield's Good Times Won't Last

This has been a good year for pork and beef producers, particularly since the summer months. Stocks like Smithfield (NYSE:SFD), Tyson (NYSE:TSN), Hormel (NYSE:HRL) and Zhongpin (Nasdaq:HOGS) have all seen double-digit stock appreciation and have beaten the market by a pretty healthy margin. Unfortunately, history strongly suggests that these good times will not last, so investors need to really give careful thought to whether they want to jump on board at this point in the cycle.

A Quarter that was Good Enough
Although the world's biggest hog raiser and processor did miss the consensus top line estimate, Smithfield nevertheless did have a respectable second quarter report. Revenue rose 11% to just under $3 billion, with a big jump in revenue from hog production and double-digit growth overall in the pork business.

Profitability is where the story really gets good for this quarter. Gross margin more than doubled from the year-ago period, and operating profit rose substantially. While corn prices are at the highest levels since the summer of 2008, and corn is a major component of feed costs which are a major component of Smithfield's costs, the company nevertheless has a favorable grain cost position at present. That allowed the company to earn a record per-head profit of $16 in the fresh pork business. 


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http://stocks.investopedia.com/stock-analysis/2010/Smithfields-Good-Times-Wont-Last-SFD-TSN-HRL-HOGS-OINK-WMT-TGT1213.aspx

Should Investors Put Hormel On The Table?

Hormel (NYSE:HRL) is an odd company. On one hand, it is difficult to find sustained success investing in large North American food companies, particularly those that are very vulnerable to commodity prices. On the other hand, Hormel does what so very few protein-focused food companies ever manage to do - the company has successfully diversified itself into a wide range of products and produces an ROIC that stands out within the industry and actually exceeds that of the average S&P 500 company. 

A Quarter with Some Gristle
Hormel ended its fiscal year with a good news/bad news type of quarter. Top line reported growth of 23% certainly captures an investor's eye relatively easily. Backing that up, volume growth of 14% is quite good, and the 9% improvement in mix and pricing is not bad either. While this quarter did have an extra week in it, that is just a 7.7% tailwind, so clearly the company has some real growth even on a stricter apples-to-apples basis. 


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http://stocks.investopedia.com/stock-analysis/2010/Should-Investors-Put-Hormel-On-The-Plate-HRL-SFD-CPB-KFT-CAG-HOGS-PPC1125.aspx