Filed Under:
Tickers in this Article: adm, bg
It's a simple little concept: The more money you have to spend, the better quality food you'll buy. With a growing global economy fueling demand for better food products, it seems logical then that investors should be considering food-product companies like Archer Daniels Midland Company (NYSE: ADM) and Bunge Limited (NYSE: BG).

"People in China and India spend their growing income first on better food," Alberto Weisser, Bunge Limited CEO, said at the BMO Capital Markets Agriculture and Protein Conference on May 17, 2007. (To listen for yourself, check out Bunge's Audio Archives). With Weisser's upbeat attitude toward the company's growing global market, an investor would expect that the company is taking advantage of the situation and experiencing solid growth of it's own. However, as shown by its cash flow, Bunge is raising some red flags that should be evaluated before making a commitment to the stock.

Bunge, A Growing Leader in Agriculture
Bunge is well positioned to take advantage of the growing demand for food products. It is a leader in many of the world's important agricultural production regions and consumption markets.

Check out this list of Bunge's accomplishments:
- It's one of the world's largest oilseed processors.
- It's one of the world's largest sellers of bottled vegetable oil.
- It's a leading supplier of premium edible oils to the U.S. food-service industry.
- It's the world's largest corn dry miller.
- It's the largest manufacturer and seller of fertilizer.
- It's a leading supplier of animal feed in Brazil.

In the last five years Bunge has shown solid revenue and income growth as shown in the table below, though there has been some slowing of both in the later years.



Cash Flow Raising Red Flags
More recently, the company is experiencing lower cash flows and negative free cash flow. Cash flow is an important measure of a firm's financial performance. Focusing on the amount of cash generated represents a better measure of a firm's performance than the income statement, which can be subject to manipulation and judgment entries. Of the last five quarters, Bunge was only able to generate positive cash flow from operations in the quarter ending December 31, 2006. When cash flow from operations is negative it means that the operations of the company are consuming more cash than they are generating. As you can imagine, companies cannot last too long in this situation. (To learn more, see Analyze Cash Flow The Easy Way.)

Free Cash Flow is another measure that identifies how much cash the company generates after making the necessary investments to grow, such as capital expansions and acquisitions. Positive free cash flow means the company is producing enough cash to support operations and growth. Many companies encounter times when they are unable to generate positive free cash flow. However, if it continues then it raises concerns about the company's future. Unfortunately, Bunge has produced substantial, negative free cash flow in four of the last five quarters. Also in the latest quarter, Bunge reported lower capital expenditures. Should this continue, the company is likely to see slower growth and lower profit.

The negative cash flows are being funded by new debt and in the fourth quarter of 2006, the issuance of $677 million of new preferred stock. Taking on debt and issuing new stock to fund capital growth is a reasonable strategy. Using it to cover the cash from operations of an established business is not a good way to grow the company and reward investors.

Management's Response
One of the factors that must be considered is that Bunge is in the business of buying agriculture commodities from farmers at one price and then selling them later at another price. The purchase of these farm products is concentrated in a few months around harvest time (October to November in North American, and the April to May in South America). The sales of the processed products takes place over the entire year causing the company to hold large inventories of these commodities until they are sold. As a result, Bunge's cash position is directly affected by the unique nature of this business cycle. So, it's natural to see a cyclical nature to the cash generated by operations, one quarter with negative cash from operations as inventories build and the next positive as the inventory is sold.

During an analysts' conference call on April 26, 2007, and the BMO Capital Markets Agriculture and Protein Conference on May 17, 2007, management was asked about the cash flow problem. Management responded that it is managing working capital, which is directly affected by commodity prices. This means the company is managing the commodity purchase and sale cycle discussed above. If this is true, there should be some positive cash generated by the operations of the company. Management also said it was reinvesting cash back into the business to drive growth. However as the cash flow statements show, it is using debt and preferred stock to fund its cash needs from operations as well as its capital expenditures and acquisitions.

The Bottom Line
Investors should avoid making an investment in Bunge Limited, until they are comfortable with the company's cash flow issues. Generating cash is one of the best measures of a company's ability to succeed. While many companies reinvest the cash they generate, resulting in very low or negative free cash flow, Bunge is encountering difficulty in generating operating cash flow. This means the company must continue to borrow or issue sock to provide the cash for capital investments and to cover working capital needs. Until this pattern is corrected investors should avoid Bunge Limited.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

comments powered by Disqus

Trading Center