Skousen: “Brazilian Food Stock Fattens Your Portfolio”

By Travis Johnson, Stock Gumshoe, February 19, 2008

This one came in from a few readers via email today, which is always delightful — but today it was even more of a delight, because here we have a company whose shares I own, and whose future I’m also fairly excited about.

The ad is for Mark Skousen’s Hedge Fund Trader service, one of many newsletters he puts out (and I have a hard time telling why any particular stock fits one of the newsletters but not another, but that’s neither here nor there).

And, as you can see from the headline, it’s for a Brazilian food company. Or, in Skousen’s words, “I’VE JUST UNCOVERED A LITTLE-KNOWN BRAZILIAN COMPANY THAT IS BOTH AN AMAZING GROWTH STORY AND ONE OF THE BEST VALUE STOCKS I’VE EVER SEEN!”

Woohoo!

He makes a few points in favor of this company — first, that food companies are counter-cyclical, since people buy food no matter what the economy’s like.

Second, that the valuation for this one is dramatically lower than for comparable companies in the US. He goes so far as to call it the “Tyson Foods of South America,” but with a PE ratio that’s a fraction of Tyson’s. The Tyson’s PE is 20, according to Skousen, and this company’s is 3.

Some more of the teaser for you:

“A company offering 1,000 products across nearly 100 countries, with solid growth, a sound dividend, and — here’s the kicker — hardly any direct exposure to the U.S. economy!”

Other clues:

60-year-old company.

One of Brazil’s largest employers

Have 12 industrial plants that process 1.3 million tons of meat and frozen foods per year.

Recent revenue growth was 25%, and profit growth 32% (quarter on quarter).

And they “just opened a brand-new meat processing plant in Russia… where McDonald’s will be one of its main customers.”

So … I’m going to leave the thinkolator in the closet, since I already own shares and know this company. What we’re dealing with here is …

Sadia (SDA)

Sadia is indeed one of the two main meat and processed foods companies in Brazil (Perdigao being the other). It’s true that they’re largely insulated from the US economy in the direct sense, since they’re about 50/50 domestic and international but none of their international sales are to the U.S. (or at least, a tiny portion — effectively none).

This is essentially a play on growing meat consumption in the developing world, and on the domestic Brazilian economy. Sadia is primarily known as a poultry producer, but they also do quite a lot of pork and some beef. They are also primarily known, in export circles at least, as a bulk seller of commodity meat, but they are working to grow their processed foods business (frozen meals, etc.). Generally, for export they’re focused on commodity poultry and for domestic consumption they’re focused on packaged/prepared foods.

I just went back to my other site and checked, and it looks like I haven’t written much about them since I bought shares, but the basic analysis I did from that time is available here (it’s pretty old, December of 2006 — since then the shares have had an odd 10:3 split, and the bird flu fears that depressed the stock are pretty much gone).

The analyst reports I’ve seen about Sadia have all been from Brazilian firms, but they are generally optimistic — looking for possible upside of 50% or so from here. This isn’t one you’d buy for current yield, the dividend has been quite small in recent years and they are investing fairly heavily in growth.

Sadia just released their results a week or two ago, and the market certainly liked them. The guidance is indeed for “double digit” growth as Skousen teased, but it’s for 12-14% sales growth, which would be down a bit from last year. The company does have a good set of presentations on their website, and they do clearly make an effort to product English materials for the 50% or so of their shareholders who are foreign.

So … clearly, I like this stock. I like that Sadia is investing pretty heavily in new capacity in Europe and Russia, and that they have good sales channels in to North Africa and the Middle East, along with Asia and Europe (most of their sales in the Americas are to neighbors in South America). And I like that they’re well positioned for a world where more people are eating more meat — they are a low cost producer, and they also have proven that they can move people up to packaged and frozen convenience foods when their incomes warrant, as well. They’ve also reduced debt significantly in the past year (particularly in relation to earnings, but also overall).

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What’s not to like? Well, the shares got genuinely clobbered in the bird flu scare and they remain very reliant on commodity poultry sales, especially for export. Another scare there could hurt them.

And their costs are going up, though it really helps that they’re in Brazil and not in the U.S. — soy and corn prices certainly impact the cost of feeding pigs and chickens, but Brazil is generally still a very low cost country for meat producers, even with soy prices climbing. Analysts are predicting that their margins are likely to be squeezed in at least the first part of this year.

What else might you want to know about Sadia? It came in second in the “best international stock” contest over at the Motley Fool last week (probably in part because it has been a Hidden Gems recommendation in the past).

And the main competitor for Sadia in Brazil, by the way, is Perdigao (PDA). Sadia tried to take them over a couple years ago, and there was a rumor that Kraft was gunning for them a few months ago, but generally I haven’t liked Perdigao nearly as much (though it’s been some time since I looked at them closely). And if you want to buy the folks selling the soybeans to Sadia, you could always look at (the much more expensive) Bunge if you’d rather be on the profitable end of that commodity trade — they tend to coordinate and build soy crushing plants in the same areas where Sadia and Perdigao are expanding operations.

The stock is trading right now around $17, for a forward PE of something like 8 or 9, depending on which analysts you listen to, and since the very confusing stock split just went through I’d double check any per-share numbers you consider in your analysis — sometimes foreign stocks like this are slow to get updated by the major data suppliers. The PE has been in the single digits for years, so this is nothing new.
I haven’t bought at these levels, but I have put in limit orders at lower prices in recent months that haven’t been hit. I don’t have any orders in currently, but I do plan to add to my Sadia holdings at some point and I intend to hold the shares I do own for a long time.