Cresud Inc: Argentine Farmland Anyone?

We seldom, if ever, research international companies, not because we don't believe there isn't value outside the good old USA, but because we find plenty of domestic research opportunities to keep us busy.

This week, however, we feature an interesting Argentine company, Cresud (CRESY) which in US terms, is a microcap. This despite the fact that the company owns 1.28 million acres of land.

Cresud is an agricultural company whose major businesses include grain production (soybeans, wheat, sunflowers, corn), beef and milk production, forestry, and to a lesser degree, real estate.

The Fundamentals
The company reported 2006 sales of $36.4 million (the company reports in the Argentine Peso), earning $8.9 million. That was up from 2005's sales of $27 million, but down from net income of $30 million (you read that correctly, 2005 net income reflects some large one time gains relative to sales). With a current market cap of $420 million, this company is not cheap on a price/earnings basis.

The Land
What attracted us was the 516,000 "hectares" (a hectare is the equivalent of 2.471 acres) or 1.276 million acres of land the company owns. Cresud leases some additional acreage, which we ignore in our calculations. On an Enterprise Value per acre basis, that works out to just $365 per acre.

If you've been following farmland at all in recent years, it is now considered by some to be an asset class. Cresud may be an interesting way for the small investor to gain non-US exposure to farmland.

The Risks
This is Argentine land, and historically, Argentina has had some severe bouts with inflation. The economy seems to be in decent shape now. The company also reports in Pesos, so their is currency risk (the current exchange rate is about three pesos to the US dollar).

The Annual Report
Cresud's Annual Report, available on the company's website is required reading for potential investors. It does an excellent job of dissecting Cresud's businesses, land uses, acreage by region and business, as well as providing data about the increasing prices of Argentine farmland.

Disclosure: the author does not have a position in this stock.

CRESY 1-yr chart:

Comments

[Agcapita:]

The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by our firm, Agcapita Partners LP (Calgary, Canada private equity firm) shows investors must be prepared to rotate into asset classes with different characteristics.

During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland. Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms), cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return) and the S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)

We believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
 Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
 Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
 Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

2008 Sep 18 06:11 PM