Fifteen years or so I was looking for a quality long-term investment that was not yet discovered. Industrias Bachoco (IBA) passed every test I could throw at the company, especially the most important one: My mother didn't like the idea. I still remember my mother saying "What? Buy a Mexican company, and on top of that a chicken company? You must be out of your mind." When my mother did not like my idea - it was my signal to buy it.
Let's take a historical look at Industrias Bachoco.
15 years ago IBA had too much cash for a company its size. And it still has too much. IBA is presently holding cash of some $9.5 per share. Some of this is debt that IBA raised last year. This debt was raised without any stated purpose for those funds. Does this mean another acquisition shortly?
Management did not believe in dilution. In 1997 when IBA went public, there were 50 million shares outstanding after its public offering. Today, there are still 50 million shares outstanding. It is interesting to note here that the controlling Bours family still owns 82.5% of all shares. This amount of ownership by the family has a downside to the equation as well. Because there are so few shares outstanding to earn commissions on, no US brokerage firm issues analytical reports on IBA. Three Mexican brokers do issue analytical research reports on IBA. I find them more then adequate, but they are difficult to understand because no one seems to consolidate all the figures into US dollars for US investors.
In 1998 when I purchased my first shares, IBA was already the largest chicken company in Mexico with over 500 locations to breed chickens. In 2013, IBA is still the largest breeder of Chickens, but IBA now has in excess of 1,000 locations. Management had made strategic purchases in its own field every two years always using its own cash.
All this made IBA a boring investment - it is still a boring investment now. But each year Bachoco has become a little less boring. And right now and after being a happy camper for about 15 years, this writer is getting downright excited.
Why? In November 2011 IBA bought OK industries, an American producer of chickens, and started to integrate OK into the Bachoco methodology. With this acquisition, IBA's growth is quickening. For instance, sales in 2011 amounted to 27 billion Mexican Pesos; in 2012 sales rose to 39 billion or 41.8% more than the prior year. For the year, IBA earned $3.60 a share, considerably more than 2011, when the earnings were only a fraction, primarily because of non-recurring items.
Last year IBA earned $3.60 a share. In the first quarter of 2013, IBA reported $1.04* with a big * because IBA had a one-time charge equal to about 30% of reported earnings. Backing this charge back into earnings, IBA would have reported earnings at about $1.30-40 a share.
With the increase in sales and profit margins, my estimate for 2013 is $4 a share. This brings IBA's earnings multiple at a trailing 9.7 a forward 8.7 times year-end expected earnings for 2013. Of course these earnings multiples do not take into consideration the cash on hand, which at the end of the first quarter was more than $9.5 a share (some of which is debt). Remove actual cash from the shares and all of a sudden the P/E drops to 7 and a fraction.
The primary cost to raising chickens is corn. This commodity has recently dropped by over 20%, giving me a great deal of confidence in my earnings projections and for continued growth.
Bird flu can always be an important factor, and right after year-end earnings were announced, IBA told investors that a bird flu, not transmittable to humans, was discovered at 5 of its over 1,000 locations.
In the first quarter IBA reported earnings of $1.04, and also took a one-time charge of $18.3, or 37 cents per share, for the effect of this flu. IBA also stated in its last quarterly report "that while not yet eradicated, the infestation is now under control." So while I still expect write-offs in this quarter, it should be nowhere close to the 30% of the first quarter's earnings.
I believe as a corporation IBA has truly superior management for the business of raising and selling chickens. However, it is also in my opinion IBA's management is totally inept in keeping US shareholders properly informed.
To my knowledge, the company last made a complete presentation to US investors in 2007. At that time management told me they would start holding conference calls when they had something to say. Seven years later and still no conference calls - but according to what I read and deduct, a great deal to say.
Because IBA's written presentations give figures in Mexican Pesos, it takes considerable work and time to place this into a US dollar perspective.
Bottom Line & Conclusion
After 15 years, IBA is facing, in my opinion, dramatic increases in both sales and earnings, and I believe an expansion in the price/earnings ratio is warranted.
Based on my earnings estimate of $4 for 2013, I would expect the price/earnings ratio to increase to 12 (11 times earnings plus $4 for cash) or 48 a share. In addition, with over $9 a share in cash and borrowing power a great deal more, I would expect further acquisitions, increased sales and earnings in the years ahead. I have owned shares in IBA since 1998, purchased additional shares in 2013, and plan to purchase more, depending on price, 72 hours after publication of this article.
Note: All information other then my own opinions and deductions come directly from either IBA's recent annual or quarterly. I have not spoken to management in 7 years.