This Food Stock Is ‘Winning Ugly’

by Will Ashworth | December 19, 2011 6:00 am

Ask any investor to name one or two food-related companies, and most would likely mention Kraft (NYSE:KFT[1]), Heinz (NYSE:HNZ[2]) or a half-dozen others. Rarely, if ever, would you conjure up Archer Daniels Midland (NYSE:ADM[3]) or Bunge (NYSE:BG[4]). However, without these two food processors, manufacturers of food products would be out of luck.

With the exception of privately held Cargill, ADM is the biggest food producer in the U.S. But while size is important, it doesn’t necessarily make it a great investment. Bunge, who very few have even heard of, and is much smaller than ADM, is a much better investment. Here’s why.

Stock Performance

Are you familiar with the mutual fund refrain that past performance doesn’t predict future returns? Despite the obviousness of this statement, it’s worth studying a stock’s past performance to understand its tendencies. Comparing two stocks is even more useful because unless one of the companies experiences some sort of catalyst to change the trajectory of its stock price, it likely will experience similar returns to those in the past.

A few points:

  1. During the past 10 years, Bunge has outperformed ADM by 211 basis points annually.
  2. On a five-year basis, ADM has outperformed Bunge by 215 basis points annually.
  3. During the past three years, Bunge has outperformed ADM by 845 basis points annually.
  4. During the past 52 weeks, their total returns are both down slightly more than 5%.

Averaging the four periods, Bunge’s annual return is 3.56%, 212 basis points higher than ADM. Furthermore, with the exception of 2008 and 2011, Bunge has has made annual gains since its IPO in 2002. It’s not glamorous, but BG stock has beaten the S&P 500 by a country mile.

Bunge’s stock is down almost 14% year-to-date. Most of the drop has come in the past week on the heels of Goldman Sachs initiating coverage of the food processor with a “sell” rating and a $55 price target. Goldman believes 2012 will be a rough year for Bunge because of weakness in soybean demand. However, in its third-quarter report, Bunge management quoted USDA forecasts that suggest global demand for soybean meal will increase by 5% in 2012.

Furthermore, the USDA is forecasting a 10% increase in demand for soybean meal in China, one of the world’s strongest economies. Goldman’s scenario doesn’t jive with the Department of Agriculture forecasts. In the bigger picture, I’m inclined to think Goldman’s concerns are much ado about nothing.

What Lies Ahead

Bunge’s performance depends on its agribusiness segment, which accounts for a majority of operating profits. In the third quarter, the agribusiness segment increased revenues 35% year-over-year to $10 billion, yet its segment earnings decreased 49% to $159 million. In fact, all five of its segments increased net sales in the quarter, but only one managed to increase segment earnings. Thankfully, the fourth quarter and 2012 appear much brighter across all segments. Especially bright is Bunge’s outlook for its Sugar & Bioenergy segment, where strong prices for sugar cane and ethanol should boost profits.

In many ways, ADM’s business is much stronger than Bunge, with revenues and margins that are higher. So how is it that Bunge’s stock has been able to outperform ADM during the past decade? That I can’t tell you. What I do know is that Bunge’s future success depends a great deal on its sugar business, which still is in its infancy, having only entered the global sugar market in 2006. Its eight sugar cane mills in Brazil have the capacity to produce 20 million metric tons of sugar and ethanol, as well as renewable electricity. Given Brazil’s commitment to flex fuel automobiles, its sugar business will continue to grow. I’d guess it will be the second-biggest segment (currently third behind edible oils) in terms of revenue by 2015.

Bottom Line

Bunge’s stock reminds me of the phrase “winning ugly.” It’s a commodities business tethered to many factors beyond its control, yet it continues to deliver value for shareholders. That’s all you can ask of a stock.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned stocks.

  1. KFT:
  2. HNZ:
  3. ADM:
  4. BG:

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