Seeking Alpha
Special situations, contrarian, hedge fund manager
Profile| Send Message|
( followers)  
After the bell yesterday, Seaboard Corporation (AMEX: SEB) announced its earnings and financial results for the fiscal quarter ended June 30, 2007. SEB did not hit or miss expectations because estimates or guidance are not given.

First, SEB traded down 2.95% today to close at $1,990 – it touched as low as $1,901.10 during today’s session. SEB is now down nearly 30% from its 52-week high set on April 19, 2007. Despite continuing to be profitable and being one of the more established and reputable marine shipping and cargo companies in the world, SEB has failed to keep pace with the market’s rally.

Furthermore, it has failed to keep pace with the other pure-play bulk shippers. The lack of participation in the overall market and bulk-shipper rally can perhaps be explained by (1) SEB tending to march to its own beat and keep to themselves; (2) SEB’s 81% run-up since September, 2006; (3) Even more impressive 563% run-up over the past five years. Short-term, perhaps SEB has run out of gas and reading the quarterly report indicates that. First, let us reflect on the FY 2006 shareholder letter delivered to SEB holders in which the CEO publicly comments on the performance of the company’s stock price, a technique SEB rarely practices. Mr. Bresky was upbeat on the tremendous performance of the stock price but warned the stock price is likely experiencing a spike within a steady upward trend. It certainly appears Mr. Bresky was spot on, again, at least over the short term.

So, for those of you looking to trade SEB or have it go straight up every day, not only does the stock market not work that way, but it was very clearly delineated in the publicly available letter to the stockholders. More importantly, reading the 10-Q, also filed after the bell in tandem with the earnings announcement, provides clues into SEB’s falling earnings.

As for the numbers, SEB posted total revenue of $742M in Q2 2007 versus $688M generated in Q2 2006. Year to date in 2007, revenue is $1.47B, an 11% increase when compared to the $1.34B generated in the first six months of 2006. However, net income fell substantially. SEB posted earnings of $33.82 per share for Q2 2007, indicating a decline of 38% from the $54.85 Q2 2006 EPS number. YTD earnings are $72.95, a decrease of nearly 24% when compared to the same period in 2006.

The culprits: (1) higher corn costs for feeding the pigs, mostly due to ethanol demand; and (2) aggressive capital expenditures, particularly in the marine shipping business unit.Further discussion in the 10-Q indicated that as far as the short-term goes, high corn prices will remain, high prices of hogs and pork cannot be sustained over long periods of time, and capital expenditures for the rest of 2007 will be aggressive. For those of you looking for a quick in-and-out trade, SEB is likely not the best bet. I anticipate seeing pressure on SEB EPS and profit margin numbers for the rest of 2007 and perhaps near-term downward pressure on the stock price as a result.

I know the above sounds bearish considering my previous discussions and posts on SEB, but before you assume I have done a 180, consider that maybe I was just being upfront and getting the bad news out before the good. Despite declining earnings and reduced cash position, SEB increased book value by 3% and after today’s $1,990 close, SEB is trading at 1.9 times book value. For long-term ownership investments, I am an avid fan of companies being able to continually increase book value per share, despite business and industry challenges. Short and simple, with the increase in shareholder equity per the 10-Q and depressed stock price, you can get far more bang for your ownership dollar at this stage with SEB.

Business wise, despite the challenges, SEB continues to show strong growth in the marine shipping segment and revenue growth in their core businesses. Although profitability of their core businesses, especially hog/pork processing, will be subject to some volatility and pressure due to price of hogs/pork and corn prices, the divisions will remain profitable. Additionally, there does not seem to be any concern that any of their significantly producing business avenues will materially decline. Simple translation, SEB will continue to churn out cash and drive up book value per share for the foreseeable future.

Valuation wise, SEB still appears to be attractive. I estimate that SEB is trading at 13.8 times approximated 2007 earnings based on the performance of the first two quarters. Granted, SEB is diverse and it is not as black and white as I am suggesting, but food service peers are trading at 18- 22 times 2007 earnings and shippers are trading at 18-25 times 2007 earnings. Certainly, the Bresky’s controlling interest in the company and being able to govern all decisions, lack of general Wall Street coverage, and business diversity can keep that P/E ratio down a little bit, but overall, good value. The book value number discussed above is also attractive as is the under 7 EV/EBITDA ratio.

Most importantly, amidst the challenges and pressure SEB is facing, the owners continue to be rewarded. A little before the 10-Q was filed with the Securities and Exchange Commission, SEB filed an 8-K announcing a buyback program to repurchase up to $50M of stock over the next 2 years. At today’s market price, that is approximately 2% of the total shares outstanding and by chance is very close to the number of shares sort per the latest filings. The latter may be coincidental, but interesting to note.

Of course, SEB may never repurchase a single share of stock, but I anticipate they will use up the entire $50M over the next two years. Granted, 2% of the shares outstanding is not a monumental number, but considering SEB’s stringent stock issuance policy, no stock option/stock grants, and other non-dilutive practices, removing any number of shares from the public marketplace is critical. I anticipate that this buyback, once completed, if ever, will result in at an absolute minimum, a $40 per share benefit to owners. A special cash dividend could have been declared ($50M divided by 1.26M shares outstanding), but I envision that SEB feels the price of common stock may fall a little further from today’s $1,900 levels.

Unfortunately, short-term, I tend to agree with that sentiment, but by buying back stock at potentially lower prices, owners will receive even more than $40 per share in value and in a tax-free/tax-deferred form. I would be surprised to see if SEB publicly discusses the results of the repurchase program – one will likely have to look at the statement of cash flows to see the results quarter by quarter. Furthermore, I am unsure which shares they will buy back, but they will not be mine.

On a more observational note, especially to those that are looking at SEB as an investment choice, I believe it is significant to note the language in which SEB presents its 10-K and 10-Q SEC filings. It is clear that SEB prefers simplicity when authoring these filings and frankly, it makes it easy for nearly anyone to understand. Sometimes, you read company filings and the language is so tortuous and complex, you wonder if they are trying to hide something.

For instance, I was reading an SEC filings the other day that is performing phenomenally well in the capital markets, is debt free, and is making money hand over fist. However, despite my extensive experience and direct knowledge of the industry they are serving, it was a struggle to surmise how they generated revenue and made money. Granted, the intricacies of SEB’s operating units is very complex and dependent on an array of very elaborate (perhaps convoluted?) variables, but from reading the filings, one can generally conclude how revenue is produced.

I have always said it is important to understand a business before investing, but sometimes, companies make it difficult to understand even the most basic items impacting the business. Seaboard does an exceptional job of telling it like it is. Certainly, further research to better understand the intricacies of each operating unit can help uncover hidden value or recognize traps better, but you have to start somewhere. It is a simple observation, but not one to be taken lightly or merely brushed off. It says a lot about how SEB treats their owners.

I maintain my previous price target, but honestly, hope it happens later than sooner. Such though may seem counter-intuitive from an investment standpoint, but seeing SEB is showing no weakness in terms of generating wealth for its owners over a long-period of time, I would not mind the accumulation phase lasting over the next 10 years. I certainly think SEB will perform very well over the next 10 years and outperform the markets on an annualized basis, I just would like a little more time to pick up more cheap shares. For those of you on the SEB bandwagon, as exciting as SEB’s run to $2,699 was and has been, it would have been nice for September, 2006 to have lasted longer to provide a longer window to acquire more shares at lower prices.

I believe SEB is in that phase now and it makes sense to take advantage of it.And of course, a company that increases book value quarter-over-quarter, keeps it simple, pays a consistent quarterly dividend (albeit a 0.1% yield), and buys back shares while not issuing new shares is a good one to own.

Disclosure: author is long SEB.

SEB 1-yr chart:

SEB 1-yr chart

Source: Seaboard Corporation Will Ultimately Reward Shareholders Despite Tough Times Ahead