JBS Does Well With Trade Wars And Higher Meat Prices
About: JBS S.A. (JBSAY), PPC
Holmes Osborne, Osborne Global Investments
Nov. 25, 2019
∑ JBS is planning on spinning off Pilgrim's Pride and other U.S. holdings which could be good for the stock.
∑ The stock is up 400% from when I first wrote about it.
∑ Earnings were released last week and were strong on demand from China and higher meat prices.
∑ Meat prices have been high and which can often portend that it's too late to buy into the industry.
JBS (OTCQX:JBSAY) is one of the largest meat companies in the world. The embattled company has had lots of issues in its home country of Brazil with bribery and unfairly obtaining low interest loans. JBS plans to spin off much of its U.S. production which also included Pilgrimís Pride. The stock is up 400% from when I first wrote about it back in 2007.
The stock trades for 27.25 reais, there are 2.67 billion shares, and the market cap is 72.75 billion reais ($17.44 billion). Earnings per share are 1.40 reais and the price to earnings ratio is 19. The dividend is set at 25% of income so it changes every year.
Sales grew from 162.9 billion reais in 2015 to 181.7 billion in 2018. Nice top line growth. Earnings have not kept up and have fallen from 4.6 billion reais to 25 million reais. Free cash flow was 4.2 billion reais last year. Nothing wrong with that! Management has used this cash flow to pay down debt. Smart! I think American companies could learn from this. Stop buying back shares when the market is at an all-time high and pay down debt instead. Debt stood at 65.8 billion reais in 2015 and 51 billion reais in the most recent quarter.
JBSís brands include: Swift, Seara, Friboli, Pilgrimís, Primo, Moypork, and Doriana. 51% of sales come from the U.S., 13% Brazil, 5% Europe, and 16% Asia. Itís amazing what a huge percentage of sales come from the U.S. JBS has grown through M&A which is why it has had so much debt on its balance sheet. S&P bumped up the rating of JBSís debt from BB- to BB.
In the latest quarter, JBS posted $86 million in profits. The company credited higher pork prices in part to the African Swine Flu, increased demand from China, and higher meat prices in the U.S. I've learned in commodities that sometimes when prices are high, you don't want to buy in. You want to wait for a glut, low prices, and then for an event to happen. Swine flu and the trade war are the events benefiting JBS at this moment. Are they going to keep having positive events? Probably not.
According to the Washington Post, JBS and three other companies control 85% of U.S. beef production. Tyson and JBS control 40% of the poultry market. JBS and three other companies control 70% of pork. It is amazing the amount of consolidation thatís occurred in meat. It seems that the costs of opening a slaughterhouse are so high that only big companies can afford to be in the business. You look at JBSís website and there are robotic arms which makes sense. JBS is in food manufacturing and is high tech, just like any other manufacturer.
What rankles some folks is that the principals of JBS, Joesley and Wesley Batista, charged with illegally obtained low interest loans in Brazil to buy out Swift in 2007. They were part of a huge bribery scheme called Operation Car Wash, which involved several high ranking politicians, including Fernando Collor de Mello, Michel Temer, and Luiz InŠcio Lula da Silva. According to the Guardian, the Batista brothers entered a plea deal in regards to hush payments the brothers were making. The conversations were being recorded.
JBS has used the tariff war with China to its advantage. China taxes U.S. pork at a 72% rate while Brazilian pork is only taxed at 10% to 12%. The company received $78 million in part of the recent farm bail out. China's imports from Brazil have greatly increased.
There are also concerns that JBS is helping out Venezuela. The company has a large presence in the country. Several U.S. Senators have voiced concerns. The concerns are that the relationship is benefiting the Maduro Presidency.
African Swine Flu has killed off close to 50% of the hogs in China. This has benefited pork prices, even though the U.S. is slaughtering more hogs per week than at any time in historyó2.7 million a week.
JBS owns 79% of publicly traded Pilgrimís Pride (PPC). The value of JBSís holdings are worth about $6.4 billion. Pilgrimís Pride stock has almost doubled since last year. JBS plans to list its holdings of American meat packers. The company has been planning on the spin off for a long time but keeps putting it off with all of the company's problems...
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