by Travis Johnson, Stock Gumshoe | September 9, 2008 9:00 am
I enjoyed reading all the comments about Monsanto in yesterday’s article[1] — there certainly are strong opinions on both sides of the broad debate over genetically modified food products, and it’s great to see some back and forth that remained civil and thoughtful. Great stuff!
So now we move on to something a little less controversial, I’m guessing:
“Operation Global Rescue” Stock #2: A Very Precious Commodity!”
This is about a company that actually owns farmland … much more basic than the service providers, and, one hopes, with more of a backstop from the underlying value of that land in the long term. What might it be?
Here are the clues, in Christian DeHaemer[2]’s words:
“This farming company was founded in 1936. They are established and safe… yet they offer one of the most exceptional growth opportunities on the planet.
“As I mentioned, the world is running out of fertile farmland… That means companies that own fertile land are worth a fortune.
“During the last 15 years, this company quietly put together a portfolio of Argentina[3]’s very best properties. They managed to buy nearly all of them at fire-sale prices, too.
“This company owns 1.27 million acres. And, they own it for pennies on the dollar.
“The best part: The value of their farmland is not reflected in the price of their stock. This gives YOU the opportunity to buy up precious land for pennies on the dollar… and make a fortune when the rest of the world figures out what’s going on.
“If you factored the price of its farmland into this company’s stock price, it’s selling for about $600 per acre.
“That’s a fraction of what quality farmland is selling for these days. For example, farmland in Iowa sells for up to $10,000 an acre. In Canada[4], $12,000 per acre.
“Institutional investors haven’t noticed this discrepancy yet… but, when they do… big money will flow into this stock, driving it into orbit.”
So DeHaemer thinks that even if this stock goes up 1,000% it could still be undervalued — what could it be?
It’s actually a stock we’ve looked at briefly before, back when Bill Mann[5] at the Motley Fool[6] was teasing a different Argentinian real estate[7] company.
This is, according to the hard-working Thinkolator …
Cresud (CRESY)[8]
I wrote a little bit about CRESY back in March[9] when I covered a Bill Mann teaser for IRSA, largely because those are the two main Argentinian real estate companies that are easy to buy, and because Cresud owns about 40% of IRSA. IRSA is a developed real estate company, for the most part, with commercial and residential projects, while Cresud is the rural REIT that owns and operates farmland.
Argentina is certainly one of the great agricultural centers of the world, and Cresud is also aggressively expanding into Brazil[10] and other neighboring countries, both to get growth and, one assumes, to lessen their dependence on Argentina. You may remember that the new president down there tried to dramatically boost export tariffs for agricultural products, which of course infuriated the farmers, and you might also know that Argentina, though far from its low point when riots in the street accompanied the default on the national debt, is not necessarily in the greatest shape — most people think “real inflation” in Argentina is at least 20-25%, though the official number is significantly lower than that.
It’s true that CRESY carries a lot of land on it’s books that’s valued at dramatically less than the current market value — last year they did sell some land for about $225 per hectare, and that land was on their books at $7 per hectare, so it’s possible that there’s enough hidden value there that this could lead to some nice gains, even though it’s probably naive to suggest that global real estate investors and analysts haven’t looked at their real asset value.
So is it worth buying? It’s a coin flip, in my opinion — on the positive side, you’ve got a beaten down share price, and a leading company in the region with significant farming, livestock, and real estate holdings, and their performance appears to be very good on an operating basis (they released earnings today[11], which didn’t seem to move the stock much).
On the negative side, the shares have been getting clobbered all year for a good reason — no one knows what anything in Argentina is going to be worth in six months, or a year, and there’s very little confidence from outside investors that the economy or inflation will come under control in the near future.
So … you flip your own coin — undervalued or scary, which side comes up?
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Good article, Gumshoe. Love the look of your new format.
Thanks for reminding of this one again Gumshoe. I have not played with this one for a few years, but it is volatile – much like the country where the land is – and did spend quite a bit of last winter in Argentina. No doubt it got hammered into spring due to crazy govt inspired strike. You know there a real problem when ag pxes at record levels and govt actually tries to put through policies that decrease production. you have piqued my interest though as even though chart looks like heck have to think this one of cheapest options on future ag growth in the world. I will also be checking on your figures of land sales as have to think these cheap. I believe that all of the land that cresud owns is in/around BA and this land is all worth significantly more than $225/ha – I would say more than 10 times this. If it is indeed on the books at $7 there is even more of a cushion on this equity. I would be interested if any other readers have more info on this. Thx for all your hard work.
Guess I should have noted quarterly results before i posted above as see your land sale figures correct(as always). I did not realize that cresud owned land way up in Salta – this is about as far away NW of BA as you can be while still in same country. Does still look like interesting speculation.
With a PE and P/cashflow of mid 30’s I don’t know why anyone would buy into it. The P/BV is about 1 but who is valueing it? I would be very careful with this company as the Peso is being sustained by the Government – although historically properties have been tagged at USD prices, when the tide goes down, ALL goes down. It may be the exoticness (if such word) of owning in Arg. – like a Ferrari, oil changes cost a heck of a lot more than changing the oil on a GM.
With the geopoilitical issues and government, I would stay away from ARG for now as property seems to be overvalued at this time.
DT
While I would defer to “nomad67”, on doings in Argentina; I have owned Cressy for awhile. I think I’ll keep it…All the “pros and cons” are
worth considering…And, to my mind, one other thing…Cressy is a majority family owned company.
If my experience with Mexico, offers any valid insight…The more powerful the family…The more protected their wealth and holdings are against
currency fluctuations, inflation, and political turmoil. Having said that; And being prepared to have “nomad67” disagree, Cressy does offer the patient, long-term investor, an excellent foothold on the future of agriculture…Which, I firmly believe, will be one of the major crisis industries
of the next several years.