[Member] Recommending a Buy on Bunge (BG) < $66.5/share

The global agriculture industry is witnessing major shifts and repositioning to support the increased food demand (shortages) and entry into the Chinese market. While this is a macro call on agriculture, Bunge (BG) stock stands on its own as it offers great valuation and growth at the same time.

The other reason I like Bunge is that it well diversified across the sub-sectors in agriculture. Its multiple segments include

  • Agribusiness: purchasing, storing, transporting, processing, and selling agricultural commodities and commodity products, such as oilseeds and grains, as a commodities trader
  • Sugar and Bioenergy: produces and sells sugar and ethanol; generates electricity from burning sugarcane bagasse; and trades and merchandises sugar
  • Edible Oil Products: packaged vegetable, including packaged and bulk oils, shortenings, margarines, mayonnaise, and other products to baked goods companies, snack food producers, restaurant chains, foodservice distributors, and other food manufacturers
  • Milling Products: produces and sells various wheat flours and bakery mixes; corn-based products; corn milling products primarily comprising dry milled corn meals, flours, and grits, as well as soy-fortified corn meal and corn-soy blend; and packaged milled rice industrial, bakery, and foodservice companies; and companies in food processing sector
  • Fertilizer segment: produces, blends, and distributes nitrogen, phosphate, and potash formulations used for the cultivation of soybeans, corn, sugarcane, cotton, wheat, and coffee.

Essentially, with this one stock, you get the exposure to fertilizer sector if you wish it, as well as grain merchandising, sugar and biofuels and other agri-products.

Current Valuation of the Company

Bunge reported a Q1 net income that came in below the expectations on the Wall Street, even as the revenues were higher due to increased costs for Corn that impacted its ethanol margins. The stock has consequently been pressured lately. The company still expects 2012 to be a great year and come in much better then 2011 as a result of higher demand and improved profit margins.

Currently the stock is at $60.59/share which gives the company a market value of $8.84 B and the following ratios

  • P/Earnings trailing = 11.41
  • P/E ex Cash = 9.8. This measure removes the excess cash on the company books that may not be required to continue normal operations and can be safely returned to the shareholders.
  • P/Book Value = 0.73
  • P/Tangible Book Value = 0.81

ADM is a company that very closely resembles BG and it currently trades at P/E of 16 and a price to book multiple of 1.15. Historically, Bunge has traded at an average Price/Book of 1.74 between 2002 and 2008, and 0.9 between 2008 to now.

History of Earnings Growth

Bunge is an almost 200 year old company. The last 10 years of its earnings history shows an average of 20% annual revenue growth. Bulk of this growth has come through expanding into new markets, both geographic and products, and strategic acquisitions. The following table shows Bunge’s earnings history (summarized)

Income 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sales 14074 22165 25168 24275 26274 37842 52574 41926 45707 58743
Cost of Sales 12572 20676 23070 22426 24379 34942 48099 40279 42753 55489
Gross Profit 1502 1489 2098 1849 1895 2900 4475 1647 2954 3254
Gross Margin 11% 7% 8% 8% 7% 8% 9% 4% 6% 6%
EBIT 661 938 1118 750 825 1587 1932 508 3375 1286
Net Income 278 418 469 530 521 738 986 283 2287 908
Average Shares 96.6 100.9 115.7 112.1 120.8 130.8 137.6 127.7 156.3 155.2
EPS 2.88 3.04 4.1 4.43 4.28 5.95 7.73 2.22 15.06 6.07
Net Profit Margin 2% 2% 2% 2% 2% 2% 2% 1% 5% 2%
ROIC 8.2 8.6 7.8 7.8 6.1 6.8 10.2 2.8 15.9 6.3
                     
Sales Growth   57% 14% -4% 8% 44% 39% -20% 9% 29%

 

Please note that the EPS in 2010 was abnormally high as the company booked gain on sale of its Brazilian fertilizer nutrients assets of $1.9B. Adjusting for this, the 2010 EPS is $2.9/share. The company projects 2012 will turn up to be better than 2011 and will exceed on revenues and earnings as it continues its expansion projects and new market entries. Just recently, the company sold its 28% minority interest in Solae JV for $440 m to DuPont, which will further bolster its capital base. At current prices, the forward P/E ratio (estimated earnings) is 8.26, excluding any one time gains or expenses.

On the balance sheet side, the company boasts a strong cash position, which is strengthened by the Solae sale. Total current assets were at $14.8 B, while the Debt is manageable $5.24 B ($4.5B in long term debt).

Balance Sheet 2012/03
Cash/Equiv 1250
Receivables 2908
Inventories 6368
Current Assets 14751
Fixed Assets 5791
Intangibles 270
Goodwill 915
Total Assets 25796
   
Payables 3834
Short Term Debt 772
Current Liab 7583
LTD 4471
Non Curr Liab 6088
Total Liabilities 13671
   
Equity 12125

Note that the current debt (short term and the current portion of the long term debt) is quite high and as a result the excess cash is not free to be distributed out to the shareholders. However, with the current ratio of 1.95 the company is sufficiently liquid to continue its day to day operations and meet its cash obligations. The sale of Solae brings up the current ratio to above 2. All in all, while the liquidity issue might be weighing on the market, I believe it is not to be of any major concern at this time.

Expansion Continues

In 2011, Bunge continued to grow its portfolio by acquiring new food businesses in India and Brazil, sugarcane plantations in Brazil, margarine business in US and new port and grain handling facility in Ukraine. For 2012, the company expects Grain Merchandising to be strong due to increased crop plantings, and trade. Oilseed processing might be a little challenged. Expects significant improvement in Sugar and Bioenergy segment, weighted towards the 2nd half of the year. The company expects new investments to fuel the growth in the Edible Oils and Milling segments. The company expects the Fertilizer business to pick up significantly in 2H as well.

Bottom line

Bunge can be purchased today at roughly half of its pre-2008 book multiple. Even as the company has grown its book value, the multiple awarded in the market has continued to lag. I believe that the macro factors that are in play in the agriculture sector will eventually force the market to readjust its multiple awarded to this stock.

The company pays a dividend of 1.7% ($0.25/share quarterly).

I will be willing to pay up to 0.8xBook Value, which is $66.5/share. This gives it a P/E ratio of 12.5. The sale target is 1.5xBook Value, which at current levels would amount to $125/share. This will change over time with the change in the book value so we will continue to reassess it periodically.  I expect the value to be realized in 2 years or less.

Allocate around 6% of your portfolio to this stock.