bunge limited BG S
December 03, 2009 - 3:25pm EST by
gearl1818
2009 2010
Price: 65.48 EPS $3.35 $3.70
Shares Out. (in M): 134 P/E 19.7x 17.8x
Market Cap (in $M): 8,781 P/FCF negative negative
Net Debt (in $M): 3,000 EBIT 0 0
TEV ($): 11,781 TEV/EBIT 20.0x 17.5x
Borrow Cost: NA

Sign up for free guest access to view investment idea with a 45 days delay.

 

Description

  

 

  

BG considers itself to be a leading global agribusiness and food company operating in the farm-to-consumer food chain.  The company states that in their 10-k and other filings.  In addition, they also say that they "believe" they are a world leading oilseed processing company and the largest producer and supplier of fertilizer to famers in South America and a leading seller of vegetable oils worldwide.  I believe that they do engage in those businesses. However, I also believe that this may be a fraud.  This realization hit me on their last conference call as they enjoyed a GAAP earnings beat based on fx gains while their free cash flow loss exceeded $1.7 BILLION dollars.  They have consistently engaged in questionable business practices and their accounting is highly suspect.  None of the sellside analysts can even attempt to explain their accounting.  They sheepishly don't even try.  For that matter, neither can the company.  We have received different answers for the same questions over multiple phone calls with management.  See bullet point #8 below.

 

As per our discussion a month ago, I have decided to submit this brief "bulletized" thesis of why I think something is really wrong at BG.  Next month we intend to provide a more complete description.  It is interesting to note that on their recent earnings call, they did not provide guidance for 2010 but said that the year should be one that they would "be able to perform well".  The company also stated that specific guidance for them is troubling as their business is tough to predict, especially now.  What I find interesting (and troubling) is that the company did not have any problem providing guidance when it was raising a lot of money a few months ago in order to de-lever its balance sheet.  Guidance that was completely unrealistic mind you.  Note that they took down their 2009 earnings guidance of $4.90 to $5.40 to a new range of $3.10 to $3.50 despite the fact that they provided this guidance in August.  Based on this new guidance which is probably not achievable anyway, the company is quite expensive as its stock is trading at $64 per share and the company has $4.5 billion of net debt on its balance sheet.  Additionally, the company guided that they would be cash flow positive for the year despite starting off the first half generating a cash LOSS of NEGATIVE $2.1 BILLION.  At the time, I was surprised that they the company had the audacity to insist that they would make up that deficit in the back half of the year.  They have never come close to that; however, the analysts bought this story hook, line and sinker. Interestingly, the company clearly backed away from this claim in the most recent quarter.  After all, they got their offering done-mission accomplished!  In any event, there is a lot to discuss with respect to BG.  Here is a brief list of items that provide a good start.  

  • They mischaracterized the nature of the use of proceeds of their offering on their conf call. They described the raise proceeds to be used for growth when their prospectus said clearly that proceeds were for debt repayment.

 

  • They mischaracterized the nature of the SEC comments on their inventory. They said that the SEC was looking at inventory practices for the industry which was, without a doubt, not the case.

 

  • Free cash flow for the first 6 months of the year was NEGATIVE 2.1 billion despite gaap earnings.

 

  • GAAP earnings were achieved largely thru currency gains.

 

  • The company employs inventory accounting akin to the financial industry-there are three levels (level 1, 2, & 3) for inventory classification. Level three affords the company the most discretion in valuing inventory. This is important b/c their short term financing lines require certain levels of readily marketable inventory. The inventory consists of soybeans so it is unclear why the discretion is needed. There are currently $700 million of readily marketable inventories listed as Level III assets.

 

 

  • In her prior job as the CFO of Swiss-Air the CFO of BG was indicted along with other members of management for fraud. She was not convicted however.

 

  • The company makes loan to farmers. Notice that more and more loans have been reclassified to long term from short term. The company is owed several hundred million dollars of past due receivables from farmers and has set a very low reserve on these loans despite their lack of ability to collect. The company also states that they have collateral for these loans but I don't think this has been filed or proven. In fact, they likely do not have collateral. Year over year, the Company continues to recognize interest income on these notes even though a large portion of them are never paid down. In spite of obvious non-payment, the Company has yet to reverse any of the interest income it has booked related to these Notes.

 

 

  • Their fx and commodity hedging is a morass-absolutely impossible to follow. They cannot explain their program and I have gotten different answers every time I have asked the same questions. They are likely speculating on commodities, similar to Enron.

 

  • In 2007, they mischaracterized $7 billion as revenues inappropriately. They subsequently, amended their financials to eliminate that revenue-whoops! Chump change I suppose. If their auditors can overlook such a material error, how are investors to trust Company claims that the Company's large volumes of Readily Marketable Inventories (currently totaling well over $4 billion) are truly in as liquid a form as the Company claims. Bunge repeatedly states these RMI should be viewed as the equivalent of cash yet has almost $700 million listed as Level III assets.

 

  • In 2007, 6 members of their Peruvian operations went to jail for misappropriating $34 million of repayments of farmer loans. While this is not necessarily the company's wrongdoing, it does suggest a lack of internal controls.

 

 

  • Bunge was pursuing legal action for collection related to $182mn of the noncurrent secured advances (loans for the 2005 & 2006 crops) as of 12/31/08.One would expect that they have a high probability of going uncollected. However, reserves for uncollectible current and noncurrent have declined to only $37mn, 6% of total advances, and write-offs for the last three years have totaled only $34mn for these loans.How is it that Bunge has been able to get by without writing off long-in-the-tooth unpaid receivables and notes that, most likely, will never be paid by moving Fertilizer Receivables from Current Assets into Long Term on a regular basis?Regarding collateral on secured advances to suppliers and farmers, is it realistic to assume that the Brazilian government would permit Bunge to actually foreclose on such collateral? If such action is unlikely shouldn't a greater allowance be carried.

 

  • There are many other issues-I will, leave you with just one more item: From 1998 to 2008, the company has generated positive Net Income in every single year bar one. In the same time period, the company has generated NEGATIVE FREE CASH FLOW in every year except for two. Collectively, BG has generated cumulative net income of $4.1bn, while burning through $1.4bn of cash during that same period. How can that be???

 

I just finished reading "the smartest guys in the room" about the Enron debacle.  As I read the book, I was simply shocked at the company's behavior and the inability of the investing public, the auditors, the attorneys and the SEC to discover what were fairly obvious warning sings of wrongdoing.  One striking similarity between Bunge and Enron is that Enron leaned heavily on their trading operations, which were difficult to follow and which they tried to obfuscate.  It seems that a closer look into Bunge's hedging activities for currency and commodities may provide some good clues.  I do not believe that they have explained their activities well to the street and it appears that they are misrepresenting their hedging activities substantially.  Trust me, if you spend time with the CFO, you will most likely walk away thinking that she is not equipped to handle such a massive hedging and trading program that BG employs.

 

So what would you pay for a company that has demonstrated a complete lack of ability to generate free cash flow during its history?  I wouldn't pay much.  I would certainly not pay $8.8 billion, which is where it trades today.  Recently, the stock has made a bit of a comeback after bogus rumors have circulated about Mosaic taking them out.  To quote my analyst, I will eat my shoe if this happens.  Mosaic does not want to own this mess.  Lastly, in the Citibank presentation today, they said they can grow earnings (GAAP not real cash earnings) by 10-12% percent per year for 3-5 years.  It seems as though this was a stealth and dramatic guide-down from consensus.  If my math is correct, growing earnings 12% from the $3.10 to $3.50 per share will not put them anywhere close to the consensus earnings of approximately $5.70 that is out there for 2010.  And, if they can only produce earnings of between $3-$4 per share next year, my guess is that they will run out of cash during the year, once again. 

Catalyst

1. Analysts do the math and realize they have just guided way below the consensus eps numbers.

2. their cash flows do not improve which will cause a liquidity crisis in 2010.

3. Fertilizer prices remain at currrent or sligthly elevated levels, which will cause a problem for the company.

4. China, slows down their purchases of soy which currrently appears to be akin to "stuffing the channel."

5. They continue to miss earnings and generate negative free cash flows and run out of explanations.

    sort by    

    Description

      

     

      

    BG considers itself to be a leading global agribusiness and food company operating in the farm-to-consumer food chain.  The company states that in their 10-k and other filings.  In addition, they also say that they "believe" they are a world leading oilseed processing company and the largest producer and supplier of fertilizer to famers in South America and a leading seller of vegetable oils worldwide.  I believe that they do engage in those businesses. However, I also believe that this may be a fraud.  This realization hit me on their last conference call as they enjoyed a GAAP earnings beat based on fx gains while their free cash flow loss exceeded $1.7 BILLION dollars.  They have consistently engaged in questionable business practices and their accounting is highly suspect.  None of the sellside analysts can even attempt to explain their accounting.  They sheepishly don't even try.  For that matter, neither can the company.  We have received different answers for the same questions over multiple phone calls with management.  See bullet point #8 below.

     

    As per our discussion a month ago, I have decided to submit this brief "bulletized" thesis of why I think something is really wrong at BG.  Next month we intend to provide a more complete description.  It is interesting to note that on their recent earnings call, they did not provide guidance for 2010 but said that the year should be one that they would "be able to perform well".  The company also stated that specific guidance for them is troubling as their business is tough to predict, especially now.  What I find interesting (and troubling) is that the company did not have any problem providing guidance when it was raising a lot of money a few months ago in order to de-lever its balance sheet.  Guidance that was completely unrealistic mind you.  Note that they took down their 2009 earnings guidance of $4.90 to $5.40 to a new range of $3.10 to $3.50 despite the fact that they provided this guidance in August.  Based on this new guidance which is probably not achievable anyway, the company is quite expensive as its stock is trading at $64 per share and the company has $4.5 billion of net debt on its balance sheet.  Additionally, the company guided that they would be cash flow positive for the year despite starting off the first half generating a cash LOSS of NEGATIVE $2.1 BILLION.  At the time, I was surprised that they the company had the audacity to insist that they would make up that deficit in the back half of the year.  They have never come close to that; however, the analysts bought this story hook, line and sinker. Interestingly, the company clearly backed away from this claim in the most recent quarter.  After all, they got their offering done-mission accomplished!  In any event, there is a lot to discuss with respect to BG.  Here is a brief list of items that provide a good start.  

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    I just finished reading "the smartest guys in the room" about the Enron debacle.  As I read the book, I was simply shocked at the company's behavior and the inability of the investing public, the auditors, the attorneys and the SEC to discover what were fairly obvious warning sings of wrongdoing.  One striking similarity between Bunge and Enron is that Enron leaned heavily on their trading operations, which were difficult to follow and which they tried to obfuscate.  It seems that a closer look into Bunge's hedging activities for currency and commodities may provide some good clues.  I do not believe that they have explained their activities well to the street and it appears that they are misrepresenting their hedging activities substantially.  Trust me, if you spend time with the CFO, you will most likely walk away thinking that she is not equipped to handle such a massive hedging and trading program that BG employs.

     

    So what would you pay for a company that has demonstrated a complete lack of ability to generate free cash flow during its history?  I wouldn't pay much.  I would certainly not pay $8.8 billion, which is where it trades today.  Recently, the stock has made a bit of a comeback after bogus rumors have circulated about Mosaic taking them out.  To quote my analyst, I will eat my shoe if this happens.  Mosaic does not want to own this mess.  Lastly, in the Citibank presentation today, they said they can grow earnings (GAAP not real cash earnings) by 10-12% percent per year for 3-5 years.  It seems as though this was a stealth and dramatic guide-down from consensus.  If my math is correct, growing earnings 12% from the $3.10 to $3.50 per share will not put them anywhere close to the consensus earnings of approximately $5.70 that is out there for 2010.  And, if they can only produce earnings of between $3-$4 per share next year, my guess is that they will run out of cash during the year, once again. 

    Catalyst

    1. Analysts do the math and realize they have just guided way below the consensus eps numbers.

    2. their cash flows do not improve which will cause a liquidity crisis in 2010.

    3. Fertilizer prices remain at currrent or sligthly elevated levels, which will cause a problem for the company.

    4. China, slows down their purchases of soy which currrently appears to be akin to "stuffing the channel."

    5. They continue to miss earnings and generate negative free cash flows and run out of explanations.

    Messages


    SubjectCatalyst
    Entry12/03/2009 04:44 PM
    Membernha855

    This idea has been widely attempted by many investors, myself included. Like most, I got my head handed to me in 2006-7 and finally gave up on trying to predict what would make these guys collapse. Is there a catalyst you have in mind?


    SubjectRE: Catalyst
    Entry12/03/2009 07:17 PM
    Membergearl1818

    hi..thanks for the question..i agree this has frustrated investors for a long time...i do believe they are close to the end of their rope...fertizer prices wont bail them out, their balance sheet is bad (they are on negative watch by s&P) and i think their earnings are fading ....if their cash flows continue to be so negative (which i think they will be) then this will put undue pressure on the company anyway...i have been short this before, i do think that 2010 is the year it breaks...just like enron, where they were able to perpetuate their behavior for years, eventually the issues come to a head....just talk to the company about their hedging program and see what they say....the analysts all know something is up here but are afraid to acknowledge that they have no idea how the company actually makes money....


    SubjectRE: weird company
    Entry12/07/2009 04:41 PM
    Membergearl1818

    thanks for your post...hard to prove things are actually frauds i agree...but i believe this may be...that is not to say that the whole company is ficticious or fraudulent but then again, ENRON had real parts of the business as well


    SubjectRE: weird company
    Entry12/07/2009 05:54 PM
    Memberjohn771

    I would expect BG to consume cash when commodity prices are rising because the cost of holding the same volume of inventory rises (and that's what happened in 2006 and 2007).  When commodity prices fall BG should generate cash (and that's what happened in 2008).  It seems hard to distinguish between this normal cyclical effect and the impact of potential ongoing fraud.  Over a full cycle BG does seem to have consumed a lot of cash.


    SubjectRE: RE: RE: weird company
    Entry12/08/2009 11:08 PM
    Membergearl1818

    nails--if a company that cant generate free cash flow ever and has "unintelligible" aspects to critical components of its financials is not a short then i guess i am confused about what it is you would ever short...frauds are hard to prove...people loved enron until it went to zero...the similarities between bg and enron are real...i am not "sure" about a catalyst but $8 of eps as you describe w/o free cash flow to me is pretty much worthless...i respectfully disagree with your view


    SubjectRE: RE: RE: RE: weird company
    Entry12/09/2009 01:57 PM
    Membernha855

    Does anyone recall the Italian sugar company that was a fraud many years ago? They also claimed that their sugar invesntories were the same as cash. I still remember that big fat lie! Am I dating myself here?


    SubjectRE: RE: RE: RE: RE: RE: weird company
    Entry12/10/2009 07:51 PM
    Membergearl1818

    hard to say but i do think the end is near


    SubjectRE: RE: RE: RE: RE: RE: RE: RE: weird company
    Entry12/17/2009 07:27 PM
    Membergearl1818

    well there are ways to hedge a short position in bg...you can buy out of the money calls....you can buy grains or options on grains...try the ticker dba...it is and etf....if grain prices dont rise then bg wont either....or you can hedge w ab basket of ag stocks ....when the rumor that bunge was getting bought by mosaic (which i didnt believe but anything is possible) i bought some bg 70 calls to make sure that i wouldnt get hit too hard if i were wrong....


    SubjectAny thoughts on this morning's news?
    Entry01/15/2010 09:51 AM
    Membertyler939

    Any thoughts would be appreciated.


    SubjectRE: Any thoughts on this morning's news?
    Entry01/18/2010 09:33 AM
    Membergearl1818

    It feels like they are desperate-- throwing the furniture in the fire to keep the heat going....they are selling their fertilizer business --the only way that they will have potential upside to earnings in the future...the remaining businesses are suffering declining margins and have very slow growth prospects...perhaps there is 3.00 of gaap earnings (maybe 3.50 per share max which i highly doubt) that is left in the company...that is not to mention the fact that they cannot generate cash earnings--let's just give them credit for that for the sake of this discussion....so what multiple would you put on that?  10x?  11? (this is adm's multiple)...so you get a 30$ maybe $36 dollar stock...after the sale of the fertilizer buz lets say there is a $50 stock remaining (assuming fertilizer buz is sold for approx $20 per share)...this is still overvalued and the company's lack of cash flow generation and very aggressive accounting will still be there....i don't think that the company wanted to do this--i don't think they had a choice...they paid up for the sugar acquisition and moody's placed them on negative watch...a downgrade would have been a problem for them as they are so reliant on short-term financing and access to the markets...i think they ran out of options this time and had to sell their crown jewel business....


    SubjectRE: RE: Any thoughts on this morning's news?
    Entry01/18/2010 06:41 PM
    Membertyler939

    What I can't figure out is why they bought the sugar business in the first place?  Is there some reason that they had to do it?


    SubjectRE: RE: RE: Any thoughts on this morning's news?
    Entry01/18/2010 07:06 PM
    Membergearl1818

    a feeble attempt at growth? they are in brazil ...i guess it is natural they would want to grow there


    SubjectUpdate?
    Entry02/04/2010 03:51 PM
    Memberissambres839

    great call on this so far. Do you have an update and tell us your thoughts on their earnings?


    SubjectRE: Update?
    Entry02/04/2010 08:34 PM
    Membergearl1818

    hi...thanks...not over yet...but....i think the earnings speak for themselves...the company has given guidance that is completely not credible...they cant even come close--they never have...also...their earnings guidance incorporates the gain from fertilizer....so what is their real core earnings? probably 3-4$ and mind you that is gaap not real cash earnings...well now they look like archer daniels which trades at 10x eps....should bg trade for double??  i doubt it....also...by not having fertilizer means that you dont have to worry about that sector getting hot and running you over in the short...so...net net...i like this alot....any normal stock would have been down 20% or more with earnings that they put out...werent they saying in the fall that they would be free cash flow positive...? well what happened....they wouldnt let me ask a question on the call--too bad...i would have asked them why they bother putting out any guidance when they never come within 40% of guidance and when they have said that guidance is "troubling" and "difficult" to do....this management team is a joke


    Subjectgreat call so far
    Entry05/02/2010 07:23 PM
    Memberissambres839
    Can you give me an update on your thoughts on this name?
     
    Thanks for the great idea.

    SubjectRE: great call so far
    Entry05/03/2010 08:44 PM
    Membergearl1818
    hey...thanks...lets see...well for starters i think it is obvious that they sold their fertilizer business (they had to as it was a working capital nightmare) at the trough at a low multiple and turned around and invested in sugar assets when sugar was trading at a 35 year high...sugar has now collapsed (down 45-50%) which is a problem ....bg is 2/3 hedged for sugar for 2010 but what happens in 2011 if sugar doesnt move back to its previous all time highs...what exactly is their earnings power...? i cant answer and i know they cant either...but it is safe to say that their earnings power is a whole lot lower than their unachievable guidance...i wonder why they even bother with guidance at this point....one more q like the last and the stock will be below 40...i think their earnings power might be $3.50 per share --maybe ...put a 10x earnings multiple (archer daniels is a good comp--trades for 9x eps) and you have a short that is still very good....hope that helps

    SubjectRE: RE: great call so far
    Entry05/05/2010 01:34 AM
    Memberissambres839
    Thanks a lot for the update.

    Subjectgearl, any updates on this name?
    Entry06/20/2011 11:35 AM
    Membertyler939
    Any updated thoughts would be greatly appreciated.

    SubjectRecoverable Taxes
    Entry11/01/2011 07:38 AM
    Membercnm3d
    Curious if anyone has spent much time looking into BG's Recoverable Tax assets. The majority of Net Income over the past two years (approximately 70%) is actually an accrual from their DTA + Recoverable Taxes, which as I understand them are related to payments BG expect to receive back from the Brazilian VAT. Thanks. Any help would be appreciated.

    SubjectRE: Author Exit Recommendation
    Entry04/26/2012 09:29 AM
    Membertyler939
    Why the closeout?  Was it just stale?  If you are still following, I would love to hear your thoughts on today's release.  Thanks.

    SubjectLevel 3 Assets and Liabilites
    Entry11/20/2012 09:32 PM
    Membercnm3d
    Anyone still following this one? Their Level 3 assets have significantly increased this year and so have the unrealized gains on said Level 3 assets. Also of note, the unrealized gains on Level 3 inventories surged in Q2, despite relatively stable grain markets and a only a small increase in total realized/unrealized gains on Level 3 inventories... which implies a large loss on realized Level 3 inventories. Then, in Q3, grain prices rip, but BG sees a large unrealized loss on L3 inventories. 
     
    Also, in Q3, BG saw a NEGATIVE PURCHASE of L3 inventories. What on earth is that? It's not a sale, as they break those out seperately. 
      Back to top