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

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  3. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  4. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  5. Investing Basics

    5 Things to "Deliberately" Do to Improve Your Trading

    Most traders are putting in trading hours, but not improving. Here are deliberate steps that can take your trading to the next level.
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Low Volatility

    Find out about the PowerShares S&P 500 Low Volatility ETF, and learn detailed information about this fund that provides exposure to low-volatility stocks.
  7. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Short Term Corp Bd

    Learn about the SPDR Barclays Short-Term Corporate Bond ETF, and explore detailed analysis of the exchange-traded fund tracking U.S. short-term corporate bonds.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Bond

    Find out about the Vanguard Intermediate-Term Bond ETF, and delve into detailed analysis of this fund that invests in investment-grade intermediate-term bonds.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Compound Annual Growth Rate - CAGR

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

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

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

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

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... 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!