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Summary

  • Record hog prices should help profits in its largest division.
  • Valuation of Hillshire should call attention to others in the space.
  • Tender offer by Seaboard for own shares coming to an end this week, with stock price near the top of the range.

Seaboard's (NYSEMKT:SEB) stock price has bumped up against the current stock price level a few times and finally broken out to all-time highs. There seem to be a number of reasons for this:

Hog Prices

With many hog producers suffering on account of the PEDV virus, hog populations have suffered, and prices have risen with the shortfall in supply. This obviously helps those producers who are not affected. Seaboard, one of the largest US producers, has not disclosed any outbreaks at its facilities. July hog futures, which traded in the high $80s last summer, are now at $125. This should provide a tailwind for the company's near-term earnings, even if it is unlikely that long-term prices will remain at these levels.

Battle for Hillshire

The takeover battle for Hillshire Brands has propelled that company's stock price from the mid-30s to almost $60 in a few weeks. Overlaying the Seaboard price chart shows an echo effect, although less dramatic in percentage terms. While Hillshire and Seaboard are different in many respects, pork/protein production and marketing are the most important part for each. Close enough for investors rummaging in a newly "hot" space, apparently.

Seaboard Tender

Most importantly, Seaboard management has dramatically stepped up their multi-year stock repurchase effort with a $100 million tender offer. While that may not look dramatic, it covers about 1/8 of all shares not owned by insiders, specifically the CEO.

Interestingly, the tender, in the form of a reverse Dutch auction, has set a price range the company is willing to entertain from $2,500 to $2,950 a share. With 4 trading days remaining until the expiration of the offer, the market price is less than 1% from the top of that range. This will lead rational shareholders to watch and wait until the last minute. Should the price exceed 2,950, the tender may unsuccessful. If it is close to that price, a few holders of larger blocks may decide to use the tender to unload shares that are hard to sell into a fairly illiquid regular market. Whether the tender is partly successful, gets completely filled or is unsuccessful, it appears likely that the current price level will end up being a floor for the price.

Conclusion

After having been very bullish on Seaboard for a long time, the price has broken out recently, for a number of reasons. While the company no longer trades at deep value levels, there is a good chance the company's tender will set a price floor close to where the stock is trading. We would hold here through at least the summer, since risk and reward favor the longs here.

Source: Seaboard Corp.: Close To Hog Heaven For Shareholders?