Is Bunge Losing Steam or Poised for Another Rally?

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Bunge (NYSE: BG) sells grains and fertilizers to farmers, processes the farm output and sells oil products to consumers. Sugar and ethanol used in bio-energy account for approximately 10% of sales. Agricultural commodities are 66% and food oils account for about 15%. The stock has returned 25% in 2012 and has already appreciated by another 5% in 2013. On the back of such a rise, investors are wondering whether the stock has leveled out or is still on course for another rally in 2013.

Impact of US Drought and Soybean Deficit

The 2012 U.S. soybean crop amounted to 3.015 billion bushels according to the USDA annual production report. This is lower than the 3.094 billion bushels that was harvested in the previous year. Diminishing soybean supplies have affected margins for meat producing companies that use soy-based animal feed. Bunge, one of the major oilseed processor may benefit from a global shortage of the soy crop as demand for livestock feed has remained surprisingly strong, regardless of high corn and soy prices.

A strong geographic presence in South America, where this season’s production of soybeans and sugarcane is looking strong, offset by drought conditions in the U.S. still works in Bunge’s favor. Bunge with its various resources can purchase and distribute grain where it is necessary.

By marshaling its global grain supply chain network, the agribusiness giant has doubled its quarterly profits in spite of the worst U.S. drought in more than 50 years. It also managed 15% volume growth in its agribusiness segment during the third quarter, assisted in no small measure by its new grain-handling and port facilities.

Sweetheart Deal with Yara

Bunge's Brazilian fertilizer business raked in revenues of $2.6 billion in 2011 and an EBITDA of $77 million. It was announced that Yara (NASDAQOTH:YARIY), the world's biggest maker of nitrogen-based fertilizers, will buy the Brazilian fertilizer business of Bunge along with its brands, warehouses and 22 blending facilities. It has also agreed to a long-term supply deal with Bunge while retaining its port terminal in Santos. The sale happened more because Yara made a good offer for the assets rather than Bunge’s need to sell off. This deal works pretty much like an operational lease, where the assets are owned by Yara, but Bunge is assured of the output.

Strides on the Bio-Diesel Front

Bunge will take over full control of biodiesel producers Mannheim Biofuel GmbH in Germany and Novaol Austria GmbH in Austria through its Switzerland based unit. Formerly, both the two biodiesel plants were operated by a 60:40 JV between Diester Industrie SAS, the French biodiesel major, and Bunge. Now the company is acquiring its partner’s stake.

Financials

  • Estimated EPS growth is over 40% on a year-on-year basis.
  • The stock is trading at a price to book value of less than 1, for a company with a strong asset base.
  • Though the stock is trading at a price near its 52 week high, it still has been at a relatively low P/E of 13, whereas the industry average is upwards of 30, making the valuations very cheap for a high growth stock.
  • Dividend yield is slightly on the lower side at 1.41 but is pretty good when compared with the industry average of 1.5.
  • The estimated five year growth rate is also a high 17.5 compared to a sector average of 7.
  • Return on equity for Bunge is also a decent 8.06, which is much better than the industry average of 6.5.

Competitive Environment

On the competition front, of the famous four majors popularly known as ABCD (Archer Daniel Midland (NYSE: ADM), Bunge, Cargill and Louis Dreyfus), the latter two are privately held. ADM and Bunge don't have much to choose from, as both companies operate at a margin of 2%, though ADM is a much bigger firm, generating revenues of $88 billion, compared to $62 billion by Bunge. The major difference is in the trading P/E where Bunge trades at 13 and ADM trades at a much higher 20, which again shows the relatively cheaper valuation of Bunge. Moreover, ADM, which has a much larger presence in the U.S., has struggled lately with the jump in U.S. corn prices due largely to the drought last summer, and this has put heavy pressure on margins in its ethanol division.

Conclusion

Bunge has 36% of oilseeds processing capacity and 60% of port capacity located in South America, and we believe it is uniquely placed to take advantage of the continued growing demand for protein in Asia. Seven out of 12 analysts following the stock have recommended a BUY or OUTPERFORM rating, and we are also of the opinion that it is one fundamentally strong stock available at low valuations.

*All financials sourced from Thomson Reuters and Yahoo Finance.


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