SEB - Seaboard: Stable Farm Economy Assets At Rare 20%+ Discount To Tangible Book Value

2023-10-19 13:45:51 ET

Summary

• Seaboard is a defensive investment opportunity trading well below tangible book value.
• The company just executed a large share buyback transaction at a -15% price discount, which is expected to be accretive to future per share results.
• If company profit margins grow on better grain/meat commodity pricing, a sizable share price advance is possible during 2024-25.

A superb defensive investment idea, trading well below tangible book value on an accretive share buyback from its controlling shareholder group, is Seaboard Corporation ( SEB ). The company owns a long list of farm economy related assets all over the world, including a top U.S. poultry processing name - Butterball . Grain storage (elevators) and transportation assets (like container ships) are part of its business model, with over 13,000 employees. The conglomerate was recently ranked #364 on the leading-revenue Fortune 500 business list in America.

Buyback Transaction - Book Value Effect

A summary of the large share buyback transaction comes directly from the company press release on October 9th,

Seaboard Corporation ("Seaboard") today announced that it has agreed to repurchase 189,724 shares of its common stock, $1.00 par value per share ("Common Stock"), at a purchase price of $3,162.50 per share. This represents a 15.7% discount to the 180-day volume weighted average trading price of the Common Stock as of October 6, 2023, a 14.9% discount to the 30-day volume weighted average trading price of the Common Stock as of October 6, 2023 and a 13.5% discount to closing price of the Common Stock as of October 6, 2023. The Common Stock will be repurchased for an aggregate purchase price of $600,002,150 from entities affiliated with Ellen S. Bresky , the Chairwoman of the Board of Directors of Seaboard, and other members of the Bresky family (collectively, the "Bresky Group"), in a privately negotiated transaction. The repurchased shares will be retired.

Seaboard expects the repurchase transaction to close on or about October 10, 2023.The repurchase will be funded with a combination of cash on hand, cash from the sale of marketable securities and a draw on Seaboard's existing credit facilities. Seaboard further expects that the repurchase will be accretive to its earnings per share and that it will retain sufficient liquidity for execution of its business plan.

I figure the transaction will be quite accretive to tangible book value per share, pushing this important hard asset backing number from $4,179 at the beginning of July to around $4,470 before adding any earnings over three months (July-October) onto this sum.

What this means is new buyers of the stock at today's $3,500 price are purchasing poultry/pork processing plant and equipment, grain elevators, transportation assets, plus overseas containerships at an estimated -21% discount to cost accounting tangible book value (even better than the trailing quarterly data presented below by YCharts using older July data).

Of the major food/grain processors and meat packaging companies, Seaboard is the cheapest on price to tangible book value I can find. Below is a graph vs. peers and competitors, where the new SEB adjusted ratio is under 0.79x.

Previous Price to Book Value Low - 2003

This book value ratio, for a conservatively-run and financially-sound business earning substantial profits each year, is sitting at the greatest bargain valuation for investors since late 2003. Back then, the share quote was $240, meaning the price has risen by a multiple of 14x over 20 years for long-term holders (+14.5% compounded annually).

Below is a chart of what happened to price right after the last "net" asset-rich buy situation appeared. Almost immediately, price rose off the floor and increased by +600% over a little more than 18 months! Am I saying similar gains are approaching? Not necessarily, but "market beating" returns (the company only pays a minor 0.3% in cash dividends currently) are looking very likely over the next year or two for new buyers of the stock.

Other Bullish Valuation Ideas

Seaboard is also becoming quite cheap when we review other valuation stats. Where else can you find a defensive food choice selling at a P/E of 10x and cash flow of 5.3x? I just wrote a bullish piece on grain storage and processing giant Archer-Daniels-Midland ( ADM ) here . ADM is comparable, but not quite as inexpensive upfront as Seaboard.

When we include changing debt and cash levels, the enterprise valuation is bumping up against 10-year lows on core cash EBITDA generation and revenues. The EV multiple on EBITDA is trading at a 35% discount to its decade-long average, and on revenues we're talking about a 50% discount!

In terms of operating cash flow returns, Seaboard is not anymore leveraged than usual. You would guess a super-low valuation story is part of an extended debt setup vs. the past. Nope. Cash flow to debt (before accounting for some extra debt to finance the share buyback) and as a percentage of sales are running closer to 5-year highs.

Yet, profit margins are running slightly lower than normal in 2023. But this could end up being a cycle low, and a truly bullish development. The whole operating foundation is not much different than the 2003-04 setup, where a long-term decline in farm industry margins reversed into a strong multi-year uptrend. Consider the fact Seaboard is priced at a P/E close to 10x today. If an unexpected "upturn" in grain/meat commodity prices lifts both sales and margins, the current quote could easily be selling at 5x or less near-future after-tax income results in 2-3 years.

Final Thoughts

Stock trading momentum over the last year has actually performed far stronger than you would expect. Weak operating results during the first half of 2023 (mainly from rotten pork and poultry markets for industry-wide profitability) and a large insider sale (effectively) have not created an onslaught of stock selling pressure. In fact, the low existing valuation of a year ago has buttressed the share price. I expect a similar positive outcome for shareholders in a recession scenario, and/or if the company experiences even worse business conditions dead ahead.

Below, I have drawn an 18-month daily price and volume chart. You will notice steadily increasing momentum indicators, including my favorites like the Accumulation/Distribution Line , Negative Volume Index , and On Balance Volume . It appears a slight bearish change in sentiment has been responsible for price weakness in 2023, not an avalanche of sellers, which I view as a big positive for remaining stakeholders.

The flip side of the investment argument, and the contrarian stance I am promoting, is now may prove a wonderful opportunity to acquire shares on the cheap in anticipation of improving revenue, cash flow, and income generation. That's exactly what happened starting in 2004. A span of many years of subpar operating margins and growth in the business (sound familiar) reversed strongly to the upside. In essence, capitalism and market forces allowed for an unusual bounce higher in margins and final results, which catapulted the price/valuation of Seaboard straight up. The stock quote moved abruptly from a cheap to an expensive valuation on the vastly improved fundamentals. Don't say something akin to 2004-05 cannot happen again!

Also, if you believe like I do, a looming recession will force the Federal Reserve and foreign central banks to print vast amounts of fiat money soon, grain/meat prices could be ready for another solid bounce higher during 2024-25. Seaboard is one way to hedge and leverage rising agriculture commodity quotes in your brokerage account, to increase your wealth over time.

Perhaps the greatest risk on your investment is the founding Bresky family still owns voting control of the business, even after the large share transaction in October to diversify their wealth. When you purchase shares, you are truly a minority owner along for the ride. As such, you will have to keep a close eye on future balance sheet changes like debt, the pace and intelligence of business acquisitions, and whether or not the family decides to sell out or merge with another food-related giant.

I rate shares a Buy and am preparing to purchase a position. If you are searching for a hard asset play, defensive in nature, with little correlation to stock market and industrial/consumer economic swings, Seaboard is an excellent pick to consider.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

For further details see: