SEB - Seaboard: A Call Option On Pork Prices

2023-07-26 11:30:00 ET

Summary

• Seaboard is a large producer of pork, provider of marine services while its Turkey division owns the Butterball brand.
• The performance in the first quarter was abysmal as the pork division performed poorly.
• Q2 may not be better but as hog prices are increasing I'm hopeful Seaboard's realized pork prices will improve.
• The stock is trading at a 15% discount to its tangible book value per share.
• The controlling family wants to sell $600M of stock back to the company.

Introduction

About 2.5 years ago, I published an article on Seaboard ( SEB ) but during that time frame the share price has barely moved. This means the total return of Seaboard since my previous article was a negative 1.1% compared to a positive performance of almost 15% if one would have invested in the S&P 500. As a reminder, Seaboard is a conglomerate with six divisions (pork, CT&M – a trading division, sugar and alcohol, power, turkey (it owns the Butterball brand) and marine). The pork segment is the second largest contributor to the revenue with $2.6B in FY 2022 but due to the low pork prices that division posted an operating loss in 2022 after posting an excellent result in 2021. The largest contributor to the revenue is the trading division but margins are pretty low there at approximately 1-2.5%. The marine segment performed very well in 2022 as the revenue increased by almost 50% but the operating income tripled on a substantial margin expansion.

Q1 was a disappointment

In any case, 2022 was a good year for Seaboard as the company reported a total EPS of just under $500/share which was pretty comparable to the $490/share in 2021 and a substantial improvement from the $244.21 in 2020.

Unfortunately this year started pretty weak. The pork segment continues to be hit by lower pork prices. Whereas the company was able to keep the revenue stable at $614M (minus 1% on a YoY basis), the operating income of $27M was converted into an operating loss of $212M in the first quarter of this year. The sizeable impact on the operating income was mainly caused by a substantial increase in feed costs while there also was an adjustment to the value of the inventory.

And it doesn’t sound like the situation will improve soon: in its comments, the Seaboard management indicated it did not expect this segment to be profitable in 2023.

Unfortunately this also had a major impact on the consolidated results. The total revenue in the first quarter came in at $2.5B, a decrease of almost 8% compared to the first quarter of 2022. Meanwhile, the operating expenses barely decreased which meant the gross income fell by in excess of 80% to $34M. And on top of that, the G&A expenses increased (which isn’t really a surprise given the current high-inflation environment).

This resulted in a consolidated operating loss of $63M compared to an operating income of $146M. Fortunately the balance sheet is very robust (I will discuss this later) and Seaboard reported a net interest income of $1M. The total other income (from affiliates and investees) was pretty good but unfortunately this was not sufficient to report a positive pre-tax income: the pre-tax loss was approximately $13M and the net loss was $16M, which represented a loss of $13.78 per share based on the average share count of 1.16 million shares.

It shouldn’t come as a surprise the cash flow statement was also pretty weak. While the company reported an operating cash flow of $93M, this included a $104M contribution from changes in the working capital position. Excluding these changes and including the $14M in lease payments, the adjusted operating cash flow was a negative $25M.

The total capex was just $111M resulting in an underlying negative free cash flow result of approximately $136M.

That’s not great, especially when you realize the first quarter was actually pretty capex-light. When Seaboard published its annual report, it estimated a total capex budget of $750M for this year , including $475M to be spent on the pork segment and $200M in the marine segment.

The balance sheet

This means the balance sheet will come under more scrutiny as Seaboard likely won’t generate enough cash flow to cover its capex plans. Fortunately Seaboard’s balance sheet still is a fortress. The net working capital position is a positive $2.43B with almost $1.3B in cash and short-term investments.

Considering there’s only $1.15B in bank debt, Seaboard still has a positive net cash position. And considering the majority of its debt consists of a term loan of almost $700M maturing in 2028 (with a cost of debt of 6.47% as of April 2023), there is no immediate pressure on the company’s finances.

And despite the loss, Seaboard’s book value is still very robust as well. As of the end of Q1, the equity value attributable to the common shareholders of Seaboard was $4.99B which works out to almost $4,300 per share. And if you’d exclude the $161M in goodwill on the balance sheet, the tangible book value was $4,160 per share.

Investment thesis

Seaboard should mainly be seen as a call option on the price of pork. Most other divisions are performing as expected, but the very weak performance in the pork division in the first quarter leaves its marks. And unfortunately Seaboard also isn’t the most transparent company either as it doesn’t provide any guidance (and its Q1 results announcement didn’t contain any information). The Q2 results should be out in the next few weeks and hopefully the recent price increases will contribute towards a stronger third quarter.

The company is also planning to repurchase $600M worth of shares , but it will buy those shares back from the controlling Bresky family at a price yet to agree upon. This should happen at a discount to market given the size of this block trade so let’s see how strong the corporate governance is at Seaboard.

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