Industrias Bachoco: Underfollowed and Undervalued

Includes: IBA, SAFM, SFD, TSN
by: Brian Harper, CFA

Industrias Bachoco (NYSE:IBA) is the leading poultry producer in Mexico. With 50 mil ADR equivalents outstanding, IBA is presently a billion dollar market cap, yet has one analyst following it (Buffalo Wild wings, a 900 mil cap and momentum darling, has 20). Boring and underfollowed, IBA has been a relative dog throughout the recovery and meets our assessments for being both cheap and safe.

With an ending 1Q10 book value of $24.14/ADR, and net cash of $3.25/shr, IBA has a balance sheet which is the envy of all it's neighbors north of the border. Yet despite the low gearing, IBA has had superior ROE relative to most North American poultry companies (Sanderson Farms (NASDAQ:SAFM) would be the lone exception). Pilgrims went through bankruptcy in 2008 and Tyson (NYSE:TSN) has been a perpetual disappointment. Smithfield (NYSE:SFD) (pork) has gone nowhere since its 2001 annual report in which it bragged of a 28% historical CAGR on the stock (CAGR since: -1%).

Obviously this industry is fairly competitive and low ROE. IBA, by my calculations, has averaged 10.1% annually in the past 11 years. This includes some more recent lean years. In particular, in 2008 it reported a loss due to currency hedging positions which got blown out in the financial crisis. The peso has more recently been coming back down, to a recent 12.25 to the dollar, from 14-1 a year ago. This boosts the translation value of their earnings, as well as book value. The peso still looks cheap, and was closer to 10.5-1 prior to the financial crisis.

Disclosure: Long IBA