Benjamin Graham found great value in stocks with share prices trading at two-thirds net current asset value per share (NCAVPS). He would then sell once the share price hit its NCAVPS. It was hard back in the 1950s to find any companies that traded so cheaply, and today it's darn near impossible. However, that doesn't mean that the NCAV is useless to investors. On the contrary, it, like many other financial numbers, can be used to compare a group of companies in a given industry. To illustrate this point, I'll examine the top five (by market cap) publicly-traded meat product stocks in America. There's a lot you can uncover from NCAV despite the fact most times it's negative.

IN PICTURES: World's Greatest Investors

Top 5 Meat Product Companies

Company Market Cap Net Current Asset Value Cash & Marketable Securities YTD Stock Return
BRF-Brasil Foods S.A. (NYSE:PDA) $9.3B ($626.3M) $1.1B 96.93%
Hormel Foods (NYSE:HRL) $5.0B ($42.0M) $312.3M 20.50%
Tyson Foods (NYSE:TSN) $4.8B ($1.76B) $845.0M 46.80%
Smithfield Foods (NYSE:SFD) $2.0B ($1.86B) $119.0M (2.70%)
Seaboard Corp. (NYSE:SEB $1.5B $570.7M $445.1M 1.42%

Only One in the Black
Seaboard Corporation, a Kansas City conglomerate, counts among its many subsidiaries a pork producer that generated 31% or $270.2 million in revenue in the second quarter, out of SEB's total of $869.8 million. Seaboard's biggest subsidiary is its commodity trading and milling division, which did $360.1 million in revenue in Q2, primarily in Africa> and South America. It's certainly a global business, but how does it compare to the big boys? Hormel delivered $847.6 million in revenue from its refrigerated products division (pork and beef) in Q2, almost as much as Seaboard's entire revenues in the quarter. Add in Hormel's other four segments and its quarterly revenue was almost double. There's no comparison. In terms of profits, it's the same story. Hormel's operating margin is 7.5% compared to 0.31% for Seaboard. Don't close the book just yet.

What Does This Tell Us?
My first thought is that Hormel is obviously a much better operated company; the margins don't lie. But that's exactly why NCAV is so helpful. It gives those interested in pure value the opportunity to dig below the surface for underappreciated assets. Investors like Warren Buffett knew this, calling it the "cigar butt" investment theory. If you buy a terrible company's stock low enough, once in awhile you'll get lucky. That's likely the case with Seaboard. It's currently trading at $1,220, 2.6 NCAV per share. Hormel and the others all have negative values and aren't applicable. Ben Graham would have paid no more than $304.49 for Seaboard stock. Further analysis is necessary to determine whether today's investment environment has changed enough to warrant a $900 difference. We shall see. (Learn the technique that Buffett, Lynch and other pros used to make their fortunes, check out The Value Investor's Handbook.)

A Rising Tide
Despite Seaboard's operating income declining for three straight years (a fourth is likely) from $320 million in 2005 to $122 million in 2008, its book value increased 49% from $978 million in 2005 to $1.5 billion three years later. During this time, its stock hit an all-time high of $2,675 in April 2007. That was truly overvalued. Today, its current price-to-book ratio (P/B) is as low as it's been since 2003 and much less than the average of its four competitors, which is 1.6 times book value. If you give Seaboard a P/B in between the average of its competitors and its own, you get 1.3, which puts a fair value of $1,564 on its stock, 30% lower than where it's currently trading.

Bottom Line
Seaboard depends heavily on commodity prices, probably more so than its competitors do. While Seaboard's positive NCAV is proof it won't be going out of business anytime soon, I have to wonder what it will do to turn the ship in the right direction. If greater profits don't come soon, this is dead money for some time. I'd look elsewhere for a value play. (In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain, read Book Value: Theory Vs. Reality.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Stock Analysis

    What Exactly Does Warren Buffett Own?

    Learn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  7. Economics

    Understanding Tragedy of the Commons

    The tragedy of the commons describes an economic problem in which individuals try to reap the greatest benefits from a given resource.
  8. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  9. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  10. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  1. Is Colombia an emerging market economy?

    Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center