Brazilian meat company BRF-Brasil Foods (Nasdaq: BRFS) has had a solid run already. Basically a marriage of convenience between Perdigao and Sadia prompted by hideous derivative losses at Sadia, Brasil Foods has nevertheless formed itself into an impressive Brazilian food concern with significant export prospects. Perhaps even more to the point, in a year where most Brazilian equities fared quite badly indeed, this one did fairly well. Of course, the more important consideration is whether there's money to be made yet from this name.
A Known Quantity In A Major Emerging Market
Although far from a household name in the United States, Brasil Foods is in some respects a Brazilian version of Tyson Foods (NYSE: TSN). Like Tyson, Brasil Foods operates in a variety of protein markets, including chicken, beef and pork. Unlike Tyson, and perhaps more like Hormel (NYSE: HRL) or Sara Lee (NYSE: SLE), Brasil Foods has a sizable branded business as well.
In fact, the size of these branded businesses was a bit of a problem for Brazil's regulatory authorities, and the company was forced to divest some assets to get the merger approved (and yes, it took about two years for regulators to approve the merger). Even here, though, the company was able to make the best of a challenging situation – Brasil Foods swapped some brands and production assets with Brazilian rival Marfrig, and though Marfrig is getting the better of the deal, it will nevertheless build Brasil Foods' Argentine business while also bringing the company into compliance with regulators.
Huge Goals, But Are They Realistic?
Brasil Foods should do close to $14 billion in revenue this year, helped not only by a relatively healthy domestic market, but improving export markets for protein (especially chicken). While Brasil Foods has been offsetting soft volumes and rising costs with impressive price increases (18% recently), management has some rather lofty goals.
On more than one occasion, Brasil Foods management has discussed a target of nearly $27 billion in revenue in 2015. Not only would this represent a near-doubling of sales in just half a decade, it would mean that the company would approach Tyson Foods in terms of scale. While the company is certainly looking to organic growth for some of that, acquisitions are likely to be a big part of the strategy. The company has recently expanded its margarine and cheese businesses with deals and supposedly considered the acquisition of Sara Lee's meat business as well. Given the sheer scale of Brasil Foods' goals, though, and the regulatory situation in Brazil, it would seem that foreign acquisitions will have to be front and center in that strategy.
A Way To Play Global Growth
In some respects, Brasil Foods gives investors a good way to play rising standards of living across the emerging world. The company sells relatively little in North America, but Russia, the Far East, and the Mideast are all major markets. Certainly that exposes the company to particular risks, including inconsistent policies regarding imports and foreign exchange volatility, but that's the price of growth in this case.
Moreover, unlike more farm-oriented names like Adecoagro (Nasdaq: AGRO) and Cresud (Nasdaq: CRESY), Brasil Foods has a strong branded business. Why does that matter? Compare the margins and returns on capital between Tyson, Smithfield (NYSE: SFD), Hormel, and Sara Lee's meat business. Management quality certainly matters, but there is definitely a margin and return boost from operating in the branded food business as opposed to the purely commodity side of the business. With management targeting 14-20% EBITDA margins by 2015, those brands are going to become even more important to the company's future.
The Bottom Line
Forget those old rumors about Warren Buffett looking to buy shares of Brasil Foods – this is far from a value play these days. In fact, Brasil Foods very nearly must achieve those lofty 2015 goals for the shares to look cheap. Then again, this is one of the few liquid Brazil plays that trades on the U.S. markets and offers growth that isn't solely dependent on pulling resources out of the ground. Moreover, it comes off as a rather clean play on emerging market food demand when considering some of the hubbub over various Chinese companies in 2011.
It's hard to recommend buying Brasil Foods shares at these prices; Cresud and Adecoagro are arguably better values. Still, it is hard for me to considering selling these shares out of my portfolio when business seems to be on the way up and there is ample room for growth and margin expansion (Peter Lynch's words about picking the flowers and watering the weeds come to mind). As such, Brasil Foods is no longer among the cheap ways to play Brazil, but it is still a quality name to consider.
Disclosure: I am long BRFS.