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. Trading Strategies

    Stock Trading for Free: Now a Reality

    Believe it or not, you can now trade stocks and ETFs for free. Here's a look at providers offering commission-free trading.
  2. Term

    What are Mutually Exclusive Events?

    In statistics, mutually exclusive situations involve the occurrence of one event that does not influence or cause another event.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  5. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  6. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  7. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  8. Trading Strategies

    The Top Spread-Betting Strategies

    What are the most commonly followed spread-betting strategies (in countries where it's legal)?
  9. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  10. Economics

    The Problem With Today’s Headline Economic Data

    Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth ...
  3. Hunting Elephants

    The practice of targeting large companies or customers.
  4. Altman Z-Score

    The output of a credit-strength test that gauges a publicly traded ...
  5. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...
  6. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!