2023-04-14 18:19:23 ET
Summary
- The firm's shares have fallen more than 20% in the past year, possibly due to the poor economy that limited consumer spending.
- Despite the economic adversities, the market overlooks the company's strong fundamentals.
- Given BG's growth-oriented objectives, I am bullish on the stock.
Investment Thesis
Bunge Limited ( BG ) is an agribusiness and food company worldwide. Over the previous year, the firm shares have plunged by more than 20%; although this might be due to the unfavorable economic climate, which curtailed consumer purchasing power, I believe that the market is overlooking the company's solid fundamentals, especially its financials.
In particular, I find it highly appealing that, besides having a solid balance sheet, the company is reinvesting its profits at a greater rate of return. The corporation is also pursuing long-term expansion strategies, including making acquisitions. The company's fundamentals have improved, and I now expect the share price to rise. Also, diversification is crucial for risk management in agriculture because of the industry's inherent instability and reliance on complicated seasons. This is why BG's product and geographic diversification help them offset these threats.
Company Overview: Manifestations of Diversification
Bunge Limited is a multinational agricultural conglomerate and food processor. Its four divisions are agribusiness, Milling, Sugar & Bioenergy, and Refined & specialty oils. The company's Agribusiness division is a unified, international operation that buys, stores, transports, processes, and sells agricultural commodities and commodity goods.
The Refined and Specialty Oils segment makes and sells edible products like packaged and bulk oils and fats, shortenings, margarine, mayonnaise, and other products made from refining vegetable oils, such as renewable diesel feedstocks. It also refines and fractionates palm, palm kernel, coconut, and shea butter.
The Milling segment mainly comprises businesses that mill wheat and corn. These businesses buy wheat and corn from farmers and dealers and turn it into milled products for food processors, bakeries, breweries, snack food makers, and other customers. Sugar and Bioenergy mainly comprise its 50% stake in BP Bunge Bioenergia and a small amount of ethanol sales through distribution.
Here is how the company's revenue is split by region and product line.
Market Screener
The agricultural industry is particularly vulnerable to product failure or price fluctuation due to seasonality and differences in economic conditions between countries. This is clear from the fact that various places and products had varying levels of success. The corporation has been able to weather the storm of underperforming product lines and locations because of its commitment to diversification.
I Think The Market Is Overlooking BG's Positives
The company offers a very appealing tradeoff between reinvested profits and rate of return, in addition to a strong balance sheet highlighted by a debt-to-equity ratio of 34%, an interest cover ratio of 7.8X, and liquidity of more than $1B.
Looking at Bunge's recent performance, where its stock has plunged 9.24% over the previous month, it's hard to be thrilled. Still, astute observers may deduce that the company's solid financials suggest the stock price could rise over the long term. Financial markets tend to reward financially sound businesses with higher share prices. Bunge's ROE is of interest to me in this analysis.
Investors should consider the return on equity since it reveals how profitably their money is being put back into the business. In a nutshell, return on equity shows how much money a company makes in relation to the money its shareholders put in.
It is highly alluring because its ROE is 19% higher than its competitors. Companies that have a high return on equity and retain a large portion of their profits tend to grow faster than their competitors.
YCharts
In my opinion, BG's exceptional 45% net income growth over the past five years can be attributed to the company's comparatively strong ROE. I believe other factors may also contribute to the company's rising profits. Features such as solid profit retention and competent leadership are examples.
When comparing Bunge's net income growth to the industry's growth, I am glad to note that Bunge's growth figure is greater than the industry's growth figure, which is 7.9%.
Bunge's median payout ratio over the past three years is 14%, which indicates that the company is keeping a sizable portion of its earnings (86%). Management uses a large part of the company's earnings to fund further business expansion.
I think Bunge has done well overall. The fact that a sizable portion of the company's profits is being reinvested at a healthy rate of return is very appealing to me. This has contributed greatly to the company's rising earnings.
Fostering Long-Term Development
The organization invests in new projects to increase efficiency and earnings as part of its long-term development ambitions. Among other approaches, acquisition plays a role in this. To begin with, its development agenda is the building of the Soy protein concentrate.
In December last year, the company announced to invest $550 million in a new US facility for soy protein concentrate. Almost 4.5 million more bushels of soybeans will be processed annually at the facility, located next to Bunge's existing soybean processing factory in Morristown, Indiana. Soy protein concentrate, both regular and textured, will be manufactured for usage in vegan foods and other goods.
The St. Louis-based Creative Solutions Center received $10 million in funding. The money was utilized to improve the plant protein industry's technological capacities, including the launch of commercial pilot plants for alternative meat and dairy products. In addition, a food service kitchen, a sensory testing lab, and an extrusion lab were all established there.
On top of these projects and others is the company's most recent purchase. This month, BG signed a purchase deal with Fuji Oil . Under the agreement, Bunge will buy Fuji Oil's recently built port-based refinery at IMTT. The multi-oil refining capabilities of the cutting-edge facility will help Bunge attract new customers. Closing is contingent upon the satisfaction of standard closing conditions.
The acquisition will expand Bunge's port-based footprint, allowing it to better serve its customers in the North American food, feed, and fuel industries and connect them to international markets. Bunge anticipates the increased capacity will be used in the second quarter of 2023.
Valuation
Looking at the relative valuation metrics, BG's valuation ratios are all below the industry, indicating that the company is undervalued. This company's forward PE of 7.82X is lower than its current PE of 8.88X, suggesting that investors are more optimistic about its future earnings potential, which should drive the stock price higher.
In addition, when I run an EPS-based DCF model against the current price of BG shares ($94.29), the model estimates a fair value of approximately $165. Given the company's solid fundamentals and the optimism baked into its forward PE ratio, I think it's reasonable to expect an increase in value of around 75%. Below are the model's results and assumptions.
Conclusion
I believe BG is significantly undervalued at the current value, and the market seems to be ignoring the company's solid fundamentals. Given the company's long-term-oriented development projects and the attractive ROE, I believe its future is bright, and its forward PE ratio lends credence to my assertion. Given this upbeat outlook, I rate the company a buy, but investors should be wary of the climatic and volatility risks associated with agricultural stocks.
For further details see:
Bunge Limited: Solid Fundamentals Backed By Long-Term Growth Levers