In Brazil, 90% of new cars sold are so-called flex-fuel vehicles that run on either gas or ethanol. Like the U.S., Brazil has been trying to lessen its reliance on oil for the past three decades by promoting alternative fuels. Unlike the U.S., ethanol is made from sugar cane rather than corn, and the growing use of sugar as a fuel in Brazil and other countries in recent years helped drive the price of the commodity. In early 2000, sugar futures closed below $5 each. They recently traded at $32.50.
Brazil, the largest exporter of sugar and ethanol, is the second-largest ethanol producer behind the U.S. If you want a piece of the sugar action, Brazil is the place to be. That brings us to Bunge (BG), a commodities company that made a big bet on Brazilian sugar this year buying several mills in that country for $1.2 billion in stock, cash and assumed debt. The deal made Bunge one of the biggest sugar processors in the country.
The acquisition also diversifies the business mix at Bunge, which includes oil seed and other milling operations. Investors fled the stock as sales fell in recent years. However, Bunge shares are up 16% in the past six months, outperforming the S&P 500’s 12% gain. Shares of rival Archer-Daniels-Midland (ADM) are up 11%. Even with the recent rise, YCharts Pro finds the shares attractive. The stock is undervalued with strong fundamentals, according to YCharts.
The agricultural processing stocks are volatile, bouncing around with commodity booms and busts, and making the overall market look staid.
Bunge isn’t alone in its interest in sugar-based fuels. Big oil is taking note of the opportunity as BP and Royal Dutch Shell (RDS.B) are investing billions in separate Brazilian ethanol ventures. ADM entered into a joint venture in 2009 to produce sugar ethanol.
But Bunge’s move makes it a bigger player than its competitor. Sugar accounts for almost 10% of sales, but has a lot of upside, Bunge says. (As demand grows, the company plans to double its milling capacity to 40 million metric tons of sugar by 2020.) Through nine months this year, Bunge total sales rose about 5% to $33 billion. Sales are down significantly from a peak in 2008, reflecting commodity prices.
Historically, Bunge has had high debt but the company is paying it down. It sold a fertilizer nutrients business in May for $3.9 billion. About $1.5 billion of the proceeds from the fertilizer sale is being used toward lowering debt. The company’s debt to equity ratio is now lower than ADM’s.
Bunge has increased dividends.
Bunge tells investors they should look at 2010 as a rebuilding year. Its core business of crushing soybeans, canola and other crops into feed for animals and oils for people will continue to grow as global food demand rises, the company says. In many ways, Bunge looks like a smaller version of ADM. As a commodities play, particularly for sugar-based bio fuels, Bunge looks attractive.