Bunge Should Jump from Here (Updated)

Deutsche Bank is out positive on Bunge (BG) following the acquisition of Corn Products (CPO) noting the steep drop in Bunge's stock yesterday, despite a 31% increase in guidance, was an obvious sign that investors generally do not favor the deal.

The Firm reiterates their Buy rating and $143 target on the shares saying they believe the acquired business will benefit from Bunge's origination, risk management and logistics capabilities, particularly in the current era of high and volatile commodity prices. Bunge will be able to leverage its fixed cost logistics network by running more products through the system. Firm estimates the acquired business will contribute approximately 13% to the combined company's EBIT in 2009E.

Deutsche also believes that Corn Products' South American business (about 30% of Corn Products' profits) is a strong fit for Bunge. This division holds about 70% market share in South America selling a variety of sweeteners, starches, animal feed and corn oil. Corn Products' business in South America is done on a pass-through basis, as opposed to the annual contracting done in the U.S. and Canada.

While the rationale for Bunge acquiring Corn Products may be unclear to the market at this time, the firm believes the product line diversification has strategic value, similar to the investments the company has made in the past.

Deutsche is raising their 2008E EPS estimate from $7.51 to $9.56 on higher fertilizer gross profit/ton and higher assumed oilseed processing margins. For 2009E, they raise their core Bunge estimate to $10.65 on continued strength in fertilizer.

Morgan Stanley maintains their Overweight rating and is raising their 2008 Base Case Bunge EPS estimate from $8.50 to $10 (i.e., previous Bull Case estimate) and introducing a new 2008 Bull Case EPS estimate of $11.50.

Notablecalls: I suspect a lot of shorts were pressing their bets on Bunge yesterday with the market giving little credit to the company's upward guidance. To me, buying Corn Products seems like a fairly smart bet, especially as BG is using its own stock as the currency. The global shortage of food is not going away any time soon and large agri players like Bunge will benefit for many years to come.

Yesterday's sell-off will be nothing more than a blip on the chart.

BG goes on the bounce list here.

UPDATE (9:08 A.M. ET): Davenport is out raising Bunge's target to $160 from $140 and adding to Value Chain. The Firm notes this transaction supports their belief that we will continue to see consolidation across the agriculture space as companies seek to capture a strong presence in different commodity segments.

The combination of BG and CPO will create a larger, more diversified and competitive global provider of agribusiness and food products and will give BG an established global presence in the corn value chain. By adding CPO's value-added sweeteners, starches and other ingredients to BG's portfolio of agribusiness, fertilizer, edible oil and milling products, the combined company will have an enhanced, more balanced product portfolio. The combination will also combine both companies' strong core geographies, as well as high growth geographies such as Asia and Latin America, among others.

Notablecalls: Davenport's $160 target is the new Street high for BG. This confirms my view BG is a bounce candidate here. Will likely see $113-$114 today.

Comments

[Jake Blues]

This is a perfect example of a stock being unnecessarily punished. Thankfully, many shrewd investors will use this opportunity to buy more BG. I was already in at $111ish, and now I plan to increase my position by 50%.