There's Value In Bunge

By Greg Sushinsky | January 04, 2011 AAA

Agricultural commodity prices rose in 2010 with the trend expected to continue into 2011. After the recession knocked down agricultural earnings and stocks, many of these stocks have rebounded and are headed near their old highs. Not all these stocks have fully recovered, though. We search for value in one such stock, Bunge Limited (NYSE:BG).

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Bunge Basics
Bunge is a U.S. based diversified agricultural company that does global business. It produces oilseeds and grain for livestock feed and food, and engages in trade of agricultural commodities, including the sale of fertilizer. Last year, it expanded heavily into sugar cane, which is used extensively in Brazil for ethanol production.

Some Bunge Numbers
Bunge's market cap is roughly $9.5 billion. Bunge did $43 billion in sales and earned $1.97 billion in the last twelve months. This revenue and income performance is historically low for Bunge, as it is rebuilding its business from the severe cyclical industry downturn in addition to the overall economy's recession. The company continues to pay down its debt. An average of the last five years' annual diluted EPS, which ranged from $2.61 in fiscal 2009 to $9.49 in fiscal 2008, is $5.11. While these earnings swings, with a revenue range to match speak to classic commodity volatility, it gives at least a reasonable benchmark to look for EPS. At this average EPS, Bunge stock, recently trading at around $65, would trade for 12.7 times earnings. Its book value is listed at $85 a share, which makes our inner Benjamin Graham sit up and take note, as Bunge trades at 0.76 price-to-book. (For related reading, see The Intelligent Investor: Benjamin Graham.)

Industry Context
It's important not to consider Bunge in an investment vacuum, but to get as much context as you can when looking at the stock. Agrium (NYSE:AGU), another large agricultural stock, is trading near its 52-week highs and has regained much of its lost share price. Bunge has not. The stock is closer to the middle of its trading range for the last 52-weeks and well off its pre-recession boom price of $129.35 a share in 2007.

There are other ag stocks that are off their highs, such as Monsanto (NYSE:MON) and Archer Daniels Midland (NYSE:ADM), each with a different underlying fundamental story from Bunge. But we're getting a bit ahead of ourselves here. While share price might perhaps be one of the first things that helps a value investor decide to pass on a stock buy, it should be the final determinant when buying.

Bunge's Business
Alberto Weisser, Bunge's CEO, recently said that he expects grain prices to continue to rise in 2011, and that food prices would be volatile. He further mentioned that grain prices should normalize in 2012 and that there wouldn't be food price inflation. The prevailing opinion in the industry would suggest that with worsening global crop conditions due to weather problems along with increasing demand, supplies will be tight. A conduit type company such as ConAgra (NYSE:CAG) has been pinched by rising prices on the input side without being able to pass along increases. For raw material agricultural companies such as Bunge, the situation of rising demand in a tighter market is potentially highly profitable.

Bunge Sugar Play
Bunge is also expanding its business. Bunge purchased a batch of sugar cane companies in Brazil for a $1.2 billion package recently. This puts Bunge squarely in the center of Brazil's ethanol market, with inviting potential to increase sales. Bunge has positioned itself extremely well to ride a profitable growth wave in what right now is the global agricultural boom.

Value And Growth
Commodity stocks, including agricultural stocks such as Bunge, will probably always be subjected to wider swings than stocks in less volatile industries. There are, however, great macro opportunities in agriculture as the long-term trend in world food demand is for strong growth. While individual investors should use these suggestions about Bunge to dig further with their own research, Bunge certainly stands up as an ag stock with long-term value.

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