The stock of agribusiness giant Bunge Limited (NYSE:BG) was a bungee jump nightmare two and a half years ago. The shares plunged 75 percent in a June-to-October freefall from $122 before weakly rebounding to $52 at the end of December 2008. Today, the company and its stock prospects are so much improved that it deserves to have its name pronounced correctly, BUN-ghee, like that of its Amsterdam founder J.P.G. Bunge in 1818.
In May, Bunge completed the sale of its most significant volatile business—producing fertilizer nutrients from mines in Brazil — for for $3.9 billion. The deal was essentially a trade for earnings stability and a strong balance sheet. The shares have climbed more than 35 percent since, yet still trade at a discount of 23 percent to book value, the difference, or net worth, between its assets and its liabilities.
Bunge’s assets of $23.1 billion include $5.57 billion of inventory, a significant pile of beans compared with the company’s $12.13 billion of book value. Much of the inventory is, in fact, soybeans, corn and sugar and is carried at fair market values. This means investors buying at today’s prices get $1 worth of commodities and related company assets for about 77 cents. Competitor Archer Daniels Midland (NYSE:ADM), which is about 50 percent larger in assets, trades at 1.34 times book. Small-cap The Andersons (NASDAQ:ANDE) goes for 1.62 times book. Bunge itself consistently traded at a premium to book value before it took its big dive.
In short, the margin of safety in price-to-book is good enough to give the stock a closer look. YCharts Pro says the stock is attractive and checks out as “excellent” for relative value.
The reason Bunge stock plunged before is that the markets saw its earnings were going to be battered by a double-whammy in the fertilizer business. First, Bunge’s costs soared as it built up fertilizer inventories ahead of the growing season. Then Bunge’s revenue from selling that fertilizer collapsed when the financial crisis quashed demand and cut off the credit Brazilian farmers needed to buy it. The fertilizer business segment lost $616 million in 2009 after having made $321 million in 2008, as measured by EBIT, or earnings before interest and taxes.
Bunge executives decided it was a good time to get out of the business. They saw government-backed producers around the world ramping up phosphate production capacity. The company booked a gain on the sale of $1.9 billion, after-tax, in May and reported record net income of $1.76 billion in the second quarter. The series of events jerked around earnings per share and made a mess for anyone trying to quickly size up Bunge’s normalized earnings and the stock’s value based on its price to earnings ratio.
Bunge used cash from the sale to pay down debt and to strengthen its position as a reliable global network capable of providing food stuffs where and when needed. For example, in the third quarter of 2010, Bunge used money from the sale to keep inventories stocked as costs increased for commodities it needs to have on hand for milling and marketing. The value of inventories rose by $1 billion, or 22 percent, in the quarter.
Might the value of those inventories plunge and wipe out a slug of Bunge’s discount to net worth? The company says it hedges. It wouldn’t give details in its last earnings conference call. If the hedges don’t work, investors should find out in short order since Bunge marks actively traded commodities to fair value in its quarterly reports.
Meanwhile, Bunge is building up its sugar business in Brazil and could score big from demand for ethanol from sugar, as described in a Ycharts analysis Dec. 21. That bet is safer for investors when the stock can be had at a discount to net worth.
Disclosure: No position