Description

Sadia, based in Brazil, is one of the world’s largest producers of meat products. Domestic sales comprise 54.6% of total revenues with 79% of these sales come from higher-margin processed products. Most of their foreign sales to 92 countries are in the form of raw meats, primarily poultry. Interestingly, Sadia does NOT do any business in the U.S. due to import restrictions.

Sadia has been in existence for 60 years and is in a very stable industry – people will give up a lot of things during financial crises, but eating isn’t one of them. Among Brazil’s food products, their brand is considered the most valuable.

Below are some standard value metrics for Sadia. By virtually any measure, Sadia is a low-priced stock relative to earnings and free cash flow, and their dividend is high relative to the average stock. But perhaps most importantly, they have issued no options over the past five years (How many publicly traded stocks can you think of that fall into this category?) and institutions own a scant 0.25% of the stock (If institutions eventually discover this gem, the share price could really take off.).

PE: 8.3
Price / Free Cash Flow: 5.06
Price / 3-Year Avg Free Cash Flow: 8.80
Price / Sales: 0.698
Dividend Yield: 3.80%
Options: 0
% Owned by Institutions: 0.25%


In addition, Sadia is focusing their efforts on sales of processed products and specialty cuts, thus improving margins and profitability. Revenues and income have grown markedly over the past five years with substantial improvements in return on equity and net margins. Cap ex spending has actually gone down during this time.

Measure 1999 2000 2001 2002 2003

Revenue / Share ($) 41.92 45.79 57.26 67.41 84.15
Earnings / Share ($) 1.20 (0.09) 3.24 3.72 7.11
Return on Equity 8.2% 11.8% 18.0% 18.5% 30.0%
Net Margin 2.9 -0.2 5.7 5.5 8.4
Cap Ex (R$) 364 156 109 119 110


Most of us believe the U.S. dollar is likely to fall relative to other currencies over the next few years. Since Sadia does business in 92 countries, but not the U.S., the company's earnings and dividends could in effect be a hedge against the dollar. Even better, if the U.S. does eventually open its markets for raw meats, Sadia will be in a great position to dramatically increase revenues and earnings.

In my judgment, Sadia is a very good company at a very good price, a rarity in today’s market. Yes, I know the share price has been bid up quite a bit over the past year or so, but the shares still represent a good value in a highly valued market.

Catalyst

Eventual opening of U.S. markets for raw meats. Nice dividend in the meantime.