If you are a fan of GARP (Growth At a Reasonable Price) stock picking, I have a relative valuation proposition that may be right up your alley. The good news is sales and earnings are primed to pop in 2021 on a lower dollar currency trade.
You may have eaten one of this company’s products over the Thanksgiving holiday, and be nearing the purchase of another for your Christmas meal this week. Seaboard (SEB) owns 50% of the Butterball turkey brand, the largest U.S. producer of the bird for your dinner table. The company is also one of the largest international sellers of pork for grocery stores and restaurants, under a variety of brand names including Prairie Fresh. It processes grains and is a leading transporter of food throughout the world (mainly North, Central and South America, plus Africa) with a fleet of owned and chartered shipping vessels. Decades ago Seaboard was an important flour mill owner domestically, before selling out to Cargill.
Image Source: Company Website
The company’s 2019 sales breakdown: Commodity Sales & Milling (mostly grains) accounted for about 46% of adjusted sales, Pork and Turkey another 36% [Butterball sales are listed under an equity accounting method on the balance sheet, with an author estimate of Seaboard’s share of privately-held revenues for this calculation.], Maritime Transportation 14%, with Sugar and Energy creating the remaining 4%.
Image Source: Company Website
The negative pandemic effect of sluggish sales and raised safety costs with production disruptions at U.S. meat/poultry packing operations has hurt 2020 profitability. For example, Butterball has reported major losses this year from COVID-19 challenges. Operating losses for the Seaboard company overall were reported in the March and June quarters, with the economic turmoil. However, as the global economy started to stabilize, a material rebound for income generation appeared in the September quarter.
Image Source: Butterball YouTube Channel
Weak 5-Year Span = Opportunity
For an accurate peer/competitor group to compare and contrast, we have to remember Seaboard owns a uniquely diversified list of businesses. It is similar in many ways to the top chicken producer Tyson Food (TSN), chicken and pork-focused Pilgrim’s Pride (PPC) or meat producer Hormel (HRL). But the corporation also processes, markets, stores and transports grains like the agribusiness giants of Archer-Daniels-Midland (ADM) or Bunge (BG). Below are 1-year and 5-year total return performance graphs (including dividends) comparing this peer group to the S&P 500’s solid gains. Over the past year, Seaboard’s grain and transportation businesses have supported better returns than the meat/poultry only packers. On the 5-year chart, a stronger dollar currency and U.S. trade wars have restrained Seaboard advances, a consequence of extensive overseas sales.
Sliding U.S. Dollar Will Prop Up Results
Forward thinkers on the Seaboard business setup could soon see much clearer skies for their investment dollars parked in the stock. President Trump’s trade war push may ease somewhat under a Biden administration, allowing for an expansion in market access and pricing at Seaboard. More importantly, a lower U.S. dollar value in the currency exchange markets (from out-of-control money printing in the U.S. to combat coronavirus economic disruption and recession) may lead to a rerating of overseas results and business valuations for Seaboard.
While based in the Kansas City area, the vast majority of company revenue is tied to foreign-derived demand. Using GAAP reported sales from the 2019 annual report (which exclude Butterball sales in the U.S.), only 21% of sales (approximately 32% estimated with Butterball) were made in the United States last year. In other words, Seaboard’s sales in currencies outside the U.S. dollar represent a good 70-80% of the total presently.
Image Source: 2019 10-K
As many regular readers know, I am quite pessimistic on the value of each U.S. dollar moving forward. Essentially, to simplify my bullish thesis for Seaboard, a lower dollar translation out of foreign currencies during 2021-22 could easily push dollar-reported revenue and income results up 20-30%, without any material change in volumes sold! Already during 2020, the U.S. dollar has fallen 10% YoY and 16% from its March high against other fiat currencies, measured by the Federal Reserve’s U.S. Dollar Index. In December, America has reached a 31-month low value for our currency in the world marketplace. And, the late 2020 devaluation trend seems to be reversing the previous multi-year dollar strength, dragging on Seaboard’s results since 2018. I explained my bearish dollar view during early summer in an article here. My outlook today for the paper dollar is just as negative, assuming an outlier stock market and/or economic collapse does not take place in 2021. For Seaboard specifically, the weaker dollar trend should become a nice business support starting in Q1 next year.
Powerhouse Balance Sheet
Seaboard has $3.7 billion in equity market capitalization today at a stock quote of $3,156. Just like Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B), management has eschewed stock splits and stock buybacks over its storied history. Another similarity is Seaboard has tried to avoid debt and leverage, instead using regular cash flow generation to re-invest in plant & equipment or smaller peer, food processing companies. The company now maintains one of the most liquid and conservative balance sheets in the food industry. Below is a decade-long chart of total liabilities to assets vs. the peer group of leading food processors.
Using almost no goodwill on its books, both accounting and tangible book value today stand at $3 billion. $1.3 billion in cash and $2 billion in working capital are contrasted against $1.5 billion in debt and $2.4 billion in total liabilities. How many other capital-intensive, blue-chip companies held a $3 billion current asset position (cash, inventory, receivables) GREATER than its total liability sum of $2.4 billion at the end of September? None that I am aware of. Its balance sheet is the envy of the food space, and looks more like a high-margin, super-profitable technology enterprise. The head scratcher in the present extreme overvaluation of U.S. equities vs. tangible assets (well over 10x for the S&P 500) is investors can scoop up Seaboard shares at a price slightly above “net” hard assets. Below is a 1-year price to book value graph vs. peers.
Including the pandemic recession, the September Q3 endpoint generated $6.9 billion in GAAP revenues and $190 million in net profits over the trailing 12 months. On the 10-year chart below you can review Seaboard’s better than industry-typical net profit margin vs. peers. The good news is a normalized global economy, combined with a dip in the dollar’s worth in currency markets, could shoot earnings straight up in 2021-22.
The price to GAAP sales ratio looks high at first glance. But this data point is deservedly strong vs. the peer group because of its conservative balance sheet and the absence of Butterball numbers. After contemplating these facts, an adjusted price to sales ratio would fall in the middle to low end of the range of competitors available for public share ownership.
When you pull all the balance sheet and valuation ideas together, Seaboard may actually be trading at a bargain level today. “Relative” to record overvaluations in the U.S. stock market generally and a peer review of the facts, Seaboard may be incredibly cheap around $3,000 per share.
Technical Trading Considerations
Since August, the nine momentum indicators I like to follow for the company have been in decent uptrends overall. Below are some charts highlighting the Seaboard price advance back above its simple 200-day moving average line, marked in red. The Accumulation/Distribution Line, Negative Volume Index, and On Balance Volume measurements have all perked up in the second half of 2020. My read of the situation is buyers have been in place on low and high-volume days, have consistently purchased shares intraday (not just at the open), and have shelled out larger dollar amounts during strong up days in price. I rate the momentum picture as better than S&P 500 average today, with room for improvement as the dollar’s value slides.
Insiders, employees and management own 80% of the common stock, from roughly 1.2 million shares outstanding. Clearly, management decisions are aligned with those of the average investor. If you are searching for a food-inflation hedge or speculation, Seaboard should be on your short list for more research.
Granted there are ways to support the stock price with tons of cash on the balance sheet. Seaboard could quickly jump the share quote, like the Coca-Cola Consolidated (COKE) situation mentioned last week here. An aggressive share buyback program (which the company has shunned to date) and a significant dividend payout raise above the present $9 annual number would grab the attention of an enlarged investor pool, focused on cash distributions and the return of shareholder capital. Below is a 3-year chart highlighting the ultra-low dividend vs. peers over time, now standing at 0.3% annualized.
I am modeling a truly impressive ramp in earnings for Seaboard during 2021-22. Unfortunately, Wall Street has little or no coverage of this equity, with only 20% of outstanding shares as a float to trade, and a history of little guidance for analysts. However, given another 10-20% drop in the U.S. dollar, EPS could climb from $166 the last four quarters toward $300 next year and $400 in 2022 (all other variables remaining the same).
As the dollar exchange rate declines, commodities have proven a tendency to hold their value as an arbitrage play internationally, rising in kind vs. the devalued currency. In addition, greater relative wealth overseas from dollar depreciation may lead to heightened demand by consumers/businesses in the Caribbean, Central and South America, plus Africa. Both conditions suggest the base dollar-revenue stream of the company is set to be supercharged starting in 2021. With no reason for Seaboard margins to fall, higher revenues mean rising profits, pure and simple. At least, that’s how the math has worked out in past dollar decline cycles. If this is our future, today’s $3,156 price is well worth the price of admission.
In terms of what if’s: given a rapid 20-30% reduction in the share count (representing about half of working capital, roughly $1 billion), on top of a sharply devalued dollar (30% below December 2020), EPS closer to $500 per ownership unit by 2023 cannot be ruled out.
Thanks for reading. This article should be a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SEB, COKE, ADM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.