Seaboard: Deep Value Ag Play With Latin America, China Exposure

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 |  About: Seaboard Corporation (SEB)
by: Christian Alpers

Seaboard (NYSEMKT:SEB) is a diversified agricultural company operating mainly in North and South America and the Caribbean. It is highly cyclical in earnings and currently at a low, which is reflected in the stock price. But it is also a growth story with a strong balance sheet and shareholder-friendly management. We hold it as a long-term position in the agricultural sector, but expect an intermediate-term earnings surge in the next 18 to 24 months, mostly from an improvement in the pork market and from its sugar operation coming fully online.

The company operates in 4 business segments; by far the largest is its integrated pork operation in the US with almost 10% market share in the US. It also markets and processes grains, primarily in South America, the Caribbean and Africa with facilities in 17 countries; a container shipping operation serving the Caribbean and South America using 34 owned and chartered vessels and extensive port facilities; the fourth segment is a major integrated sugar operation in Argentina and a floating power plant currently under contract for sale.

Seaboard is over 72% owned by its major shareholder, the Bresky family. Steven Bresky is the CEO. Management is stable and generously compensated, but in a completely non-dilutive way. The company operates with cash bonuses, other perks and rolling 5-year contracts. An executive leaving prior to expiration would lose significant accumulated benefits. All of this has resulted in management stability and a long-term orientation. The company has rarely issued new shares, and mostly bought back stock. A current buyback of $100m has just been approved in 2009. The already small float has been continuously shrinking over the past few years.

Seaboard's pork operations are by far the largest segment, with 62% of fixed assets. The operation has been built up in recent years with a major investment in a state-of-the-art Guymon, OK processing plant. The operation in vertically integrated, from raising of hogs to wholesale marketing of pork, allowing for quality control and efficiency. While the operation's scale, efficiency and lack of debt makes the company a low cost producer, earnings are largely determined by the market prices for pork and feed costs. These are close to cyclical lows/highs, respectively, leading to losses at Seaboard and in the industry.

As these prices improve cyclically, as they invariably will, the pork operation can be expected to contribute significant operating earnings, after having been a drag on earnings in 2008 and 2009. A fee marketing agreement with another significant pork producer, and a small biodiesel operation have been mitigating earnings swings somewhat.

The trading and milling operation has been a steady contributor of earnings, albeit with significant variability given their dependence on commodity prices. The company is looking to expand this segment.

The shipping segment is another area earmarked for opportunistic expansion as the company expects to pick up vessels and equipment at distressed prices. Despite severely distressed cargo rates in 2009, the division was profitable although at a much reduced level from previous years.

In Argentina, the company owns 60,000 acres of sugar plantation and a plant that produces 250k metric tons of sugar and 14m gallons of alcohol annually. While the operation was at break even in 2009, there is significant upside from the addition in 2010 of a 40MW cogeneration power plant, alcohol sales and the ultimate removal of price controls imposed by the populist government.

A floating power plant operated by the company is under a sales agreement to close in early 2011, generating a gain of about $50m

Overall, given the diversity of Seaboard's operations and their dependence on a number of different and very variable commodity prices, precise financial modeling of earnings is a bit of a futile exercise. However, most of the operations are at depressed earnings levels at present with the potential for a significant snap-back over the next 24 months.

We see an upside of some $300m, or $240 per share. This is based on the high end of each division's operating results over the last 5 years. Allowing for fluctuations in (always present) one-time items, exchange rate gains/losses and capacity additions since the last peak, we would see net earnings at $300 per share around the next peak, and apply a 10 multiple (somewhat arbitrary, but not unreasonable for a cyclical stock) for a target price of 3000 per share, just over the 2700 the stock reached at its last high. This seems conservative given a stronger balance sheet and smaller float since 2005.

Additionally, the company's strong financial position will allow for attractive opportunistic expansion of various operations, and/or significant stock buybacks. The current buyback plan would cover about 30% of the float, at the present stock price. Ultimately, going private by offering to buy out the external holders is another possibility, perhaps more likely than not over the next 5 years. We are long-term holders.

Disclosure: Author is long SEB