Seaboard: A Great Cyclical Company Fairly Valued By The Market

Aug.20.12 | About: Seaboard Corporation (SEB)

Seaboard Corporation (NYSEMKT:SEB) is a diversified international agribusiness and transportation company. In the United States, Seaboard is primarily engaged in pork production and processing, and ocean transportation. Overseas, Seaboard is primarily engaged in commodity merchandising, grain processing, sugar production, and electric power generation. Let's take a closer look at the different divisions.

Pork Division - This division produces and sells fresh and frozen pork products to further processors, foodservice operators, grocery stores, distributors and retail outlets throughout the United States, Japan, Mexico and other foreign markets. Seaboard's hog production operations consist of the breeding and raising of over four million hogs annually. The hog production operations are located in the States of Oklahoma, Kansas, Texas and Colorado.

Commodity Trading and Milling Division - The Commodity Trading and Milling Division is an integrated grain trading, grain processing and logistics company. This Division markets wheat, corn, soybean meal, rice and other similar commodities in bulk to third parties and affiliated companies. This division also operates grain and feed milling and related businesses with 28 locations in 14 countries.

Marine Division - Through its subsidiary, Seaboard Marine Ltd., and various foreign affiliated companies and third party agents, the company provides containerized cargo shipping service to 25 countries between the United States, the Caribbean Basin, and Central and South America. Seaboard's primary marine operation is located in Miami.

Sugar Division - This division grows sugar cane, produces and refines sugar, and produces alcohol in Argentina. A large portion of the sugar cane is grown on nearly 70,000 acres of land the company owns in northern Argentina. The cane is processed at an owned mill, which is one of the largest in the country (annual processing capacity of 250,000 metric tons of sugar and 15 million gallons of alcohol).

Power Division - Seaboard, through its subsidiary, Transcontinental Capital Corp. (Bermuda) Ltd., operates as an independent power producer in the Dominican Republic. It generates electricity into the local Dominican Republic power grid.

The company is highly cyclical in earnings. In the last 10 years earnings per share have been as low as $9.38 and as high as $284.66. This is mainly driven by commodity prices which have a huge impact on earnings and margins. Gross margins are low (between 7% and 17% in the last 10 years). What makes the company attractive is its relatively high return on capital (defined as sales / net tangible assets) which has averaged 2.9 in the last 10 years. The company has a strong balance sheet with more cash ($395 million) than debt ($173 million). Book value has increased each year from $487 million in 2002 to more than 2 billion today. Over 74% of all shares are owned by insiders. The majority stakeholder is the Bresky family. Management has been buying back shares in the last years (~1% of outstanding shares each year).

The long term growth record of the company is outstanding. Revenue has increased with 12.3% and earnings per share with 23% on average over the last 10 years. Graph 1 shows the revenue trend per division. Management has been able to do achieve this with only 9% on average asset growth for the same period.

Graph 1: revenue trend

Seaboard is a great allocator of capital. Around 75% of 10-year net income is reinvested in the business, with a return on retained earnings of 31%. These are the kind of returns you would like to see when a company reinvests earnings. The company looks cheap with a P/E of 8.9, P/B of 1.2 and EV/EBITDA of 7. Graph 2 shows the 10 year earnings trend.

Graph 2: 10-year EPS trend

For the more cyclical companies, like Seaboard, I prefer to calculate the P/E ratio based on 10 year averages. The 10-year average EPS is $144. This gives the company a P/E OF 15 and an EV/EBITDA of around 12. I consider the company to be fairly valued. My interest in the more cyclical companies increases when they trade below 12 times 10-year average EPS. Seaboard would have to trade around $1730 to make it attractive enough for me to initiate a position. This happens to be close to the net tangible book value of the company. With a ROE of around 15%, it would meet my threshold of a 15% annual return. The long-term track record of Seaboard would most likely give the long term investor a higher average annual return. I added the company to my watch list. It is a well-run company with a great balance sheet, a profitable growth track record and providing agriculture exposure through its pork division.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SEB over the next 72 hours.