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Even good companies will try the patience of investors from time to time, and that's the story today on Brasil Foods (BRFS). Although nobody really thought major export markets like Japan, Russia, or the Mideast were going to turn around on a dime, they managed to get even worse than expected. The good news, though, is that Brasil Foods remains one of the strongest consumer plays in one of the largest emerging markets, not to mention one of the best export-leveraged food companies in the world.

Exports Gut First Quarter Profits

Brasil Foods reported 5% revenue growth, which was relatively solid insofar as analyst expectations went. The problem is that while domestic sales rose 9%, export revenue was down slightly despite a 7% increase in volumes. More on this in a bit.

The poor performance of Brasil Foods' export business just wrecked the profits here. Gross margin dropped more than four points from the year-ago quarter, while operating income dropped about half. EBITDA was likewise weak, falling by about one-third.

Inventories And Turbulence Take Their Toll

While companies like Unilever (UL), Nestle (OTCPK:NSRGY), and PepsiCo (PEP) have been doing quite well selling into the emerging markets, Brasil Foods is not having quite the same success in its export endeavors. Simply put, there were problems in all of its major export markets.

In Japan and the Mideast, the biggest problem is inventory - high inventory levels are not pushing down order levels, but prices are getting hammered as well. In Russia, the issue has been an import ban (that is being partially undermined or counterbalanced by more exports to the Ukraine), while Argentina's economic problems are hurting that market.

If there's good news, it's that there are some signs of progress and exports (especially poultry) have been picking up starting in March. This is still going to take time to resolve, so investors should be on the lookout for another tough quarter before expecting things to improve in the second half.

Solid Brands, Big Plans

Investors looking to play the growth of consumer spending in Brazil and/or the global trend to higher protein consumption ought to seriously consider these shares. Relative to Tyson (TSN), Smithfield (SFD), and Pilgrim's Pride (PPC), Brasil Foods benefits both from lower production costs and less excess political baggage.

Brasil Foods' brand value is also something to consider. Cresud (CRESY) and Adecoagro (AGRO) are interesting plays on the rising value of farmland and agricultural products in Argentina and Brazil, but they are ultimately commodity companies. What's more, a lot of the equity valuation there rests on the value of the land under cultivation and those values can swing wildly during economic cycles.

What Brasil Foods has, though, are brands that are well-known throughout Brazil and valued by consumers. To that end, Brasil Foods was able to rise prices another 8% in Brazil without crushing their volumes. Looking ahead, Brasil Foods management is looking to not only acquire overseas businesses with leveragable brands, but also establish their own brands overseas and move away from such heavy reliance on commodity protein exports.

The Bottom Line

There are not a lot of cheap agriculture or food plays these days. If an investor really wants to own an undervalued stock that can benefit from Brazil's growth, maybe Potash (POT) or Deere (DE) make incrementally more sense.

Brasil Foods is not dramatically undervalued today, but I'm hanging on for what I see as the long-term growth potential of its brands and Brazil's advantaged position as an agricultural exporter to the world. Just as Nestle is seldom ever cheap because of the quality of its brands and its business, I believe the same will be increasingly true of Brasil Foods in the years to come.

Source: Brasil Foods: Little Expected, Even Less Delivered