WHGLY - JBS: Buy The Biggest Meat King For Its Undervaluation And Resilience

2023-04-25 02:01:35 ET

Summary

• JBS is the world's largest meat producer, setting it up for substantial long-term resilience that is desirable in a consumer staples firm.
• JBS is not without risk, as it is saddled with high debt, an unsustainable dividend, and lumpy financials.
• I think the risks outweigh the benefits here, and I rate the shares a buy.

Background

I recently published an article about why WH Group Limited (WHGLY) (WHGRF), based in Hong Kong, is a speculative buy despite my general rule against investing in autocratic and illiberal countries, including Chinese companies. My conclusion was that the typical risks of investment were reduced for the firm, and that as one of my watchlist's three "meat kings" (i.e. three publicly-traded top global producers of various meats), WH Group is a solid and resilient consumer staples firm built to weather otherwise limited risks.

Today, I will cover another meat king from my watchlist, JBS S.A. ( JBSAY ).

A Brief Introduction to JBS

As the firm proudly states on its website , JBS is the world's top producer of both beef and poultry, the world's second biggest producer of pork, and a leading producer of lamb. Considering that pork, poultry, and beef are the #1, #2, and #3 most popular meats consumed globally , it makes sense that JBS is ranked the world's largest meat producer . It is also fitting that its US division, JBS USA, is one of the top meat producers in the country .

JBS is thus a globally-renowned powerhouse that has earned the title of "meat king" due to its unmatched production rate.

JBS' Financials

Over the period ranging from 2013-2022, JBS' revenue for each consecutive year has been as follows: $39 billion, $45 billion, $41 billion, $52 billion, $49 billion, $46 billion, $51 billion, $52 billion, $62 billion, and $71 billion. If revenue seems a bit lumpy to you, you're not alone. Most financial metrics for JBS are similarly lumpy for at least a certain period of time. Gross profit similarly bounced up and down between $5 billion and $7 billion from 2013-18, before more steadily rising from ~$8 billion to ~$11 billion between 2019 and 2022. Net income was one of the lumpiest metrics throughout the past decade, ranging from a high of $1.5 billion pre-COVID-19 to a low of just $6.5 million with no discernible rhyme or reason, save the possible cost of its acquisitions throughout the decade; still, net income never went negative for the company during this period. Cash flow from operations displayed much less lumpiness, staying in the $1-2 billion range from 2013-18, excluding outlier year 2014 that saw over $3 billion in op. cash flow; from 2019-2022, op. cash flow reached $3.4 billion, $4.5 billion, $3.8 billion, and $2.5 billion for each consecutive year. This indicates a short-lived pandemic boost for the core business that seems to be fading as the pandemic peters out.

In sum, JBS has a habit of producing fairly lumpy financials. Consequently, unlike with WH Group or Tyson Foods, Inc. ( TSN ), JBS' financial trends are a bit harder to spot. Regardless, they are worth mentioning, because they all indicate a vague, but perceptible, upward trend, especially during the pandemic-fueled meat shortages. As the world's largest meat producer, JBS' lumpy but positive financials are another reason to consider investment in the company. However, there is an important caveat to this, which I will address in the competition section.

Valuation

In the WH Group article, I summarized my thoughts on its valuation thusly:

With... clear undervaluation, WHGLY/WHGRF may be one of the few value stocks investors and analysts missed while pivoting to defensive names during the market crash last year. Remarkably, it appears to still be undervalued today, ripe for value investors interested in an overlooked consumer staples firm.

Of course, I wrote this summary before researching JBS; imagine my surprise when the valuation data I praised WHGLY/WHGRF for paled in comparison to JBSAY's data. JBSAY's ratios include a Price to Earnings GAAP ratio of 2.6, a Price to Sales ratio of 0.10, a Price to Book ratio of 0.86, and a Price to Cash flow ratio of 3. For context, WHGLY/WHGRF's metrics that I was so excited about were a P/E GAAP of 5.5, a P/S of ~0.27, a P/B of 0.79, and a P/Cash flow of ~4.6. Both firms are significantly undervalued compared to the sector averages of 22, ~1, 2.5, and 16 for P/E GAAP, P/S, P/B, and P/Cash flow, respectively.

All this to say, JBSAY is even more undervalued than WHGLY/WHGRF, which I already thought was an excellent deal. JBSAY stock is thus an outright steal on the basis of its valuation, especially considering its lumpy but mostly solid financials.

JBS' Competition

As I did for WH Group, I will compare JBS to fellow meat king Tyson on a few other metrics to demonstrate what advantages and disadvantages JBS has compared to competitors in general.

JBS vs Tyson - Diversification

Regarding diversification, JBS is very diversified across production of the three most popular meats consumed on earth, i.e. beef, pork, and chicken. Tyson has a similar strength here though; as I stated in my article on WH Group, "since its acquisition of IBP, Inc over two decades ago, Tyson has become one of America's largest producers of pork and beef," alongside its flagship product of chicken meat. With JBS' presence in the lamb industry, however, as well as its leading position in that market segment, the edge in diversification goes to JBS over Tyson.

JBS vs Tyson - Valuation

Regarding valuation, I already praised WHGLY/WHGRF in the previous meat king article for its undervaluation compared to its sector. I noted that WHGLY/WHGRF is also quite undervalued compared to TSN stock, which itself is valued below sector averages. Logically, then, since JBSAY is more undervalued than WHGLY/WHGRF, which is more undervalued than TSN, which is more undervalued than sector averages, JBSAY takes the cake for valuation.

JBS vs Tyson - Financials

Regarding financials, I will first recap Tyson's financial data from the WH Group article:

Tyson['s] revenues stay[ed] in the ~$30-40 billion dollar range [from 2013] until 2018, after which point the company reliably stayed above $40 billion and climbed steadily to over $53 billion in 2022. Tyson's gross profit sharply jumped from the $2 billion range in 2013 and 2014 to the $4-5 billion range in 2015, where it hovered until 2020, after which it jumped to the $6 billion dollar range. Tyson's net income and operational cash flow both steadily increased from 2013 to 2022, with net income rising from $780 million to $3.2 billion in that 10 year timespan, and operational cash flow taking a bumpy ride from $1.3 billion to $3.8 billion from 2013 to 2021, before taking a noticeable dive in 2022 with op. cash flow of about $2.6 billion.

So, Tyson seems to have more reliably increasing net income and gross profit for its revenue compared to JBS, indicating better margins for Tyson's business. JBS also appears to be suffering financial weakness related to the ebbing effects of the pandemic on meat prices, yet Tyson's financials are exhibiting less weakness, or even sustained growth. Compared to JBS' lumpy, somewhat increasing, possibly weakening financials, I would already give the edge to Tyson here.

Unfortunately, as I alluded to in the main financials section in mentioning a caveat to JBS' financials, there is an elephant in the room when looking at JBS' data: its massive debt. At over $19 billion, the company's debt easily dwarfs both its cash ($2.5 billion) and market cap ($7.5 billion) combined. Tyson's debt of $8.3 billion, while also dwarfing the firm's cash of $650 million, is much more manageable, especially compared to its market cap of $21 billion. Tyson wins handily on the basis of financial strength.

JBS vs Tyson - Dividends

Regarding dividends, JBS offered a paltry $0.02 per share dividend in 2018 and axed its dividend in 2019, before bringing back the dividend at $0.18 in 2020, raising it to $1.11 in 2021, and cutting it to $0.79 in 2022. Instead of looking at the dividend yield today (~10%), I will look at the dividend safety, since that is where a major red flag appears. While Tyson's payout ratio is ~28%, JBS' payout ratio is over 200% , hardly a sustainable level. Frankly, JBS shouldn't be giving cash to investors at all right now, on account of the $19 billion in debts it has to pay. With a payout ratio of over 200%, it probably won't be issuing a dividend much longer, either. Tyson's sustainable dividend thus beats JBS' doomed distribution.

JBS' Advantages

To summarize JBS' advantages, it is a leading consumer staples company that produces large volumes of in-demand food products consumed internationally, and caters to a growing market of beef lovers. JBS' diverse operations in all three major meat categories, and its dominance in all three major meat markets, grants the company great resilience in nearly any macroeconomic condition, a hallmark of a good consumer staples firm. It also sells its popular meat products in greater volumes than either Tyson or WH Group, which likely grants the company's business some benefits from greater economies of scale.

Furthermore, JBS' headquarters is in the country of Brazil. While it may be a poorer country in the Global South, Brazil at least isn't an outright autocracy, instead being classified as a flawed democracy as of 2023. Autocratic governance in Brazil would make investment in JBS a likely nonstarter due to the issues I raised in a previous article about the risks investing in autocracies, but thankfully those risks are off the table for JBS, unlike WH Group.

Finally, I think JBS' severe undervaluation seems disproportionate to the investment risks. If others agree, we may see investors start to favor this value play, and bid up the price as they buy it en masse. Savvy observers who buy it before other investors pile in can get shares of the company at a good discount.

In sum, I am a fan of JBS because it has none of the autocracy risks of WH Group, all the downturn-weathering benefits of diversification in meat production like Tyson, and produces and sells greater quantities of meat than either firm. Buying JBSAY gives investors the best of both worlds, and at a massive discount to boot.

JBS' Disadvantages and Risks

JBS' financials imply that its core business has lower margins than WH Group, as Tyson's business does. Lumpy financials could discourage investors who want more predictability and regularity from the companies in their portfolio. Additionally, the massive debt load could drag on the company's financials, and the company's stock price, for years to come. Investors with a reduced risk tolerance may not want to own this name.

Still, substantial deterioration of the core business seems to be a far-off possibility, and JBS appears to be executing well. In fact, debt and financial lumpiness aside, JBS has been executing well for many years, consistently producing and selling the largest volumes of an incredibly popular product that is unlikely to be abandoned anytime soon.

Conclusion

As the world's largest meat producer in all major segments, JBS S.A. is positioned to endure as a mainstay in the consumer staples sector. While it has issues regarding its uneven financials, heavy debt, and a poorly-supported dividend, the underlying core business is fairly solid, and is likely to support the company's future success.

Accordingly, for long term value investors with a degree of risk tolerance, I rate JBSAY a buy.

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