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Summary

  • Seaboard reported Q2 earnings of $93.7 million or $79/share, more than doubling last year's figure.
  • As I predicted last September this was almost exclusively due to a spike in the company's pork business operating profits, which were up nearly 5-fold.
  • I continue to remain bullish despite the recent correction in lean hog prices as feed costs are down; the company's other businesses are performing well also.

Seaboard Corporation (NYSEMKT:SEB) recently posted strong second-quarter earnings. The company earned $93.7 million, or $79/share vs. $39.5 million or $33/share in the second quarter of 2013. The increase represents significant increase in the company's profit margins, as sales rose only slightly from $1.68 billion to $1.69 billion. This stellar performance on the earnings front was predominantly driven by the company's pork division, which generated over $110 million in gross profits out of $134 million total. I should also note a $10 million increase from $8 million to $18 million in gross profits in the company's largest business by revenue - commodity trading and milling.

The key driver of Seaboard's earnings is its port business, and as I predicted in September, pork prices would rise as Smithfield Farms' pork production would be exported to China after that company was acquired by Shuanghui International. China's insatiable demand for pork led it to purchase America's largest pork producer and this has caused American pork prices to rise with pork producers reaping the benefits. I argued last September that Seaboard was the best way to play this given its relatively high exposure to pork.

Since then the pork price has risen along with Seaboard's pork profits, and even though the stock recently hit an all-time high it is trading at around the same level it was back then. I think the recent weakness is due to the correction we've seen in pork prices, but Seaboard's profit decline will be offset by a decline in feed prices as the entire agricultural complex is weak. I also think that this is a short-term blip in a longer-term bull market given the rise in global food demand coupled with the fact that arable land is declining on a per-capita basis. Those companies that can efficiently produce things such as pork will benefit, and we are already beginning to see this with Seaboard's awesome earnings growth.

Even though the stock trades at $2,880/share I think it remains cheap with secular tailwinds, and it should outperform long term.

Source: Update: Seaboard's Earnings