|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||426||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
|Subject||10/24/02 earnings release|
|Entry||10/27/2002 01:03 PM|
|Third Quarter and Niine Month 2002 Results|
Celaya, Guanajuato, Mexico October 24, 2002
Industrias Bachoco S.A. de C.V. (“Bachoco” or “the Company”), Mexico’s leading producer and processor of poultry products, today announced its unaudited results
for the third quarter and nine month periods ended September 30, 2002. All figures have been prepared in accordance with Mexican GAAP and are stated in constant
Mexican pesos as of September 30, 2002.
Third Quarter 2002 Highlights:
v Total sales increased 5.1% year-over-year.
v Operating Income increased 5.2% with respect to the same period last year.
v EBITDA reached Ps. 378.7 million.
v Operating margin remained flat year-over-year at 11.96%.
v Net income was Ps. 257.5, up 15.0% compared to the third quarter of 2001; EPS reached Ps. 0.86, up 14.6% from Ps. 0.75.
Comments from the CEO:
Cristóbal Mondragón, CEO of Bachoco stated, “The Mexican economy didn't show significant signs of recovery this quarter, despite the expected GDP growth with respect to the third quarter of 2001. The inflation rate was higher than expected and the volatility of the Mexican peso increased during this quarter. In our business, chicken supply was stable with solid demand levels while the egg
market showed signs of recovery as the oversupply conditions in this market improved, which favored our results for the quarter. We are pleased with the results achieved by the Company in the third quarter of 2002. Our performance improved with respect to the same quarter of last year; sales increased by 5.1%, while our operating income, net profit and EBITDA also improved. In particular our volume of eggs sold increased significantly. We obtained an operating margin of 11.96%, which we consider to be a good level since the third quarter has historically been our weakest quarter. Furthermore, our financial position remains strong with cash and cash equivalents of Ps. 1,902.2 million at the end of the third quarter.”
THIRD QUARTER 2002 RESULTS
Net sales for the quarter reached Ps. 2,505.9 million, an increase of 5.1% compared to Ps. 2,384.0 million reported
for 3Q01. This was mainly due to a 55.1% increase in sales of table eggs, 2.3% growth in chicken sales, partially
offset by declines of 12.0% and 30.0% in sales of balanced feed and swine, respectively. These sales were the result of an increase in egg volume, higher chicken prices and decreases in volume of swine and balance feed.
Net Sales by Product Line 3Q01 3Q02
CHICKEN 82.5% 80.3%
EGGS 6.7% 9.8%
BALANCE FEED 8.2% 6.9%
SWINE AND OTHER LINES 2.6% 3.0%
TOTAL COMPANY 100.0% 100.0%
Bachoco’s chicken volume decreased 3.5% due to lower inventories of chicken after the strong volume sold in the
second quarter of this year. Egg volume increased 74.9% as a result of the acquisitions made in the second half of
the last year. Swine volume decreased 7.3% while balanced feed volume decreased by 16.5%.
Bachoco’s gross margin was 26.1% in 3Q02, compared to 25.8% in 3Q01, due mainly to higher chicken prices, and
lower unit costs of eggs and swine, partially offset by a reduction in prices of eggs and swine. Consequently, the
Company’s operating margin was 11.96% compared to 11.94% in 2001. Gross margin in chicken improved significantly with respect to the same quarter of last year. EBITDA during the quarter reached Ps. 378.7 million
The taxes recognized by the Company during the third quarter were Ps. 70.2 million.
Net income for the three-month period ended September 30, 2002, increased by 15.0% to Ps. 257.5 million. Earnings per share reached Ps. 0.86, compared to Ps. 0.75 reported for the same period of 2001.
|Subject||10/24 earnings cont'd|
|Entry||10/27/2002 01:06 PM|
NINE MONTH 2002 RESULTS
Net sales for the period reached Ps. 7,631.2 million, representing an increase of 3.1% from Ps. 7,403.2 million
reported for the same period in 2001. This reflects an increase in volume of chicken and eggs sold, partially offset by a decline in prices in all our product lines.
Bachoco’s egg volume sold increased significantly, by 81.8%, due to productivity increases and the additional
volume from the acquisitions made in the second half of 2001. Chicken volume grew 2.9%, mainly due to productivity improvements and the acquisitions made at the end of last year, while swine volume decreased 5.4% and balance feed volume decreased 5.2%.
Gross margin for the nine-month period was 27.1%, practically flat compared to the gross margin of 27.4%
reported in the same period of 2001. Gross profit was Ps. 2,070.5 million, an increase of 2.1% compared to Ps.
2,028.3 million reported for the first nine months of 2001.
Operating income declined 3.7% to Ps. 1,010.2 million in the first nine months of 2002 from Ps. 1,049.0 million for
the same period in 2001, mainly as a result of the decline in prices in our main product lines. Consequently, the
Company’s operating margin decreased to 13.2% in 2002 from 14.2% in 2001.
Net income was Ps. 1,066.7 million in the first nine months of 2002, up 23.8% from Ps. 861.7 million reported in
the first nine months of 2001. Earnings per share reached Ps. 3.58 during the first nine months of 2002 compared to Ps. 2.89 per share, reported for the same period of 2001.
Cristóbal Mondragón, Bachoco’s Chief Executive Officer, stated: “Our financial structure remains solid. Capex
continued to be financed entirely by resources generated from our operations and we continued reducing our debt
level from Ps. 316.3 million as of December 31, 2001 to Ps. 205.0 million as of September 30, 2002. Our liquidity
also remains at solid levels with cash and cash equivalents of Ps. 1,902.2 million as of September 30, 2002.”
The current ratio as of September 30, 2002, was 5.5 to 1, compared with 4.3 to 1 as of December 31, 2001. The
Company’s capital structure (defined as long-term debt divided by the sum of long-term debt and stockholders’
equity) was 0.9% as of September 30, 2002.
On October 3rd, the Company announced the effects of Hurricane Isidore on its Peninsula de Yucatan Production
Complex, which affected approximately 60.0% of its chicken growing farms. Bachoco took immediate action to
resume normal operating levels. The processing plant, incubator and feed mill are now 100% ready to operate at
normal levels. The chicken growing farms will be repaired gradually and each will begin operating as their repairs
are completed. The company expects the last of the farms to be completed in approximately 10 months at which
point the entire complex will resume its original production levels.
Industrias Bachoco S.A. de C.V. is Mexico’s leading producer and processor of poultry products with over 700
production and distribution facilities throughout the country. The Company is also Mexico’s third largest producer of table eggs. It sells swine to meat packers for the production of pork products and is an important player in the balanced feed industry. The Company posted net sales of Ps. 10,032.3 million for fiscal 2001 divided among the Company’s four main product lines as follows: 82.4% chicken and chicken-related products, 7.5% balanced feed, 7.5% table eggs, and 2.6% swine.
|Subject||Do they ever buy back stock? W|
|Entry||10/28/2002 10:37 AM|
|Do they ever buy back stock? Why are they public at this valuation. Would seem to make sense to go private.|
|Subject||quantify debt reductions|
|Entry||10/28/2002 11:46 AM|
|Interesting idea. Have seen write-ups of this one before but never pulled the trigger. |
1. Can you help me to quantify exactly how much debt they have paid down over the last year or two in USD?
2. Wouldn't raising the payout ratio be a good way to boost the share price if that was their goal? Any sense they'll do so now that they're nearly debt-free?
3. Any questionable management history or corporate governance issues?
I also think Bud's question on share buybacks and a potential MBO is also critical to understand better. Would minority shareholders get paid if they took it private somehow?
Thanks, and great idea.
|Entry||10/28/2002 12:27 PM|
Who are the largest shareholders?
How do the ADR's relate to those traded on the Mexican Bolsa?
Since you mentioned Pilgrims Pride, which is going through a recall for its Wampler division, does IBA sell any products in the US? Would they ever be exposed to a product recall in Mexico?
|Subject||matt, bud & david|
|Entry||10/28/2002 08:49 PM|
|1) Quantification of debt paydown|
Debt was 2,155.6 million pesos (roughly $215 million US) on December 31, 1999, in the wake of their acquisition of Campi, the industry #4. Since then, they've paid down debt to $24 million US.
2) Share buybacks.
Yes, the company buys back shares on the local exchange and has been doing so since Feb 1999. This year, Bachoco bought back 660,000 shares on April and 703,000 shares in August. 6 local shares amount to 1 ADR. So an equivalent of about 227,000 ADRs have been bought back this year, leaving about 49.6 million ADRs/equivalents. Not bad considering the liquidity of the shares - only about 20% floats.
As the debt has come down to minimal levels, there are a couple of routes to go with their free cash production - buybacks, dividends, and acquisitions. They have a history of great attention to and success with all three. They talk as if all three will be continued but also weighed against each other, which I believe is healthy for a growing business with a lot of strategic options.
I asked the company directly whether management might consider taking it private, with an insinuation that I might want to help. I was told clearly that no, they do not wish to go private but rather wish the public markets to respect the stock more, and they plan to improve communications with investors as one way of doing that. They still clearly have hope that the public market will recognize what it has here. The English is not perfect but here's part of a quote: "No, because we believe that we need to increase our information for investors, our results are improving."
On a related subject, I would imagine that if management wanted to cash out by now, IBA would already be a part of Tyson or CHX. They just went public in 1997 after a long history as a private enterprise, and they seem to think that it just takes time for the public markets to catch on. Some patience, if you ask me...
4) Corporate governance
Clearly the controlling family - respected in Mexico - has no need to follow anyone else's agenda. But with them owning the vast majority of Bachoco common, the interests seem aligned with us. They use some stock compensation, but it hasn't overwhelmed the share buybacks. The valuation here is something else, though. I could care less if the company is paying for a $2 million estate for the CEO, etc. - not that I know any such stuff is going on.
5) Largest shareholders
Biggest one is JP Morgan Chase at 2% (maybe from the IPO), but after that there's virtually no other institution that owns a signficant block. The family controls over 80%.
6) Product recall risk
Affects all food companies. I don't know of any problems in this area specific to Bachoco. To the extent that a bad batch went out, I don't know that a) it would be very widespread given Bachoco's operational structure and b) I don't know that the financial or goodwill penalties would be as great as in the US.
Hope that helps,
|Entry||10/28/2002 08:58 PM|
|Clearly one reason the stock trades so low is lack of information flow to US investors. Yahoo and other free services do not carry up-to-date information on the stock generally. |
Below are info resources for this stock. The most efficient way is to e-mail Maria (below) and ask for recent earnings reports as well as to be put on the press release list. The company (via the Mexico contact info) answers questions readily (often same-day) as well. E-mail works best. The web site also has a compendium of earnings releases - but e-mail gets you the releases faster than the web site.
The financial statements are broken out clearly in US Dollar equivalents, and are easy to understand. As well, earnings reports are provided in English.
BMV: Bachoco UBL
Cristóbal Mondragón, CEO
María Appendini, IRO
PH: 011 (52) 461-618-3555
In New York:
PH: (212) 406-3690
|Entry||10/28/2002 09:12 PM|
|One of you asked re: ADR relation to local currency. |
Six local shares amount to one ADR
Local price of Bachoco common today is 14.50 pesos
So 10.06 pesos/1 USD
(14.50 X 6)/10.06 = 8.65/ADR
I've found that no matter how illiquid an ADR is, within reason, you can generally find shares if you go just a little above the conversion price, for obvious reasons as ADRs are readily convertible into local shares. I suspect this was the case today - the stock is easier to buy than it seems, like a lot of similar ADRs.
|Entry||10/29/2002 03:10 PM|
Hi, Micheal --
I like IBA too, and have owned some for a while. It's cheap, but has some obstacles to value recognition --
- Family controlled
- Small float
- Thinly traded (the ADR's, anyway -- I have no idea how it trades in Mexico.)
- "Chicken Ranch"
As you point out, some patience may be required. I'm happy to wait.
|Subject||Comments and Questions (1)|
|Entry||10/29/2002 04:21 PM|
Thanks for your Pilowtex responses. I spent another day on it but just couldn't get comfortable with its balance sheet in these uncertain times. Good luck with it...
IBA is another story, though. I took an instant liking to this one and used the links you provided to get more info sent to me. While I'm waiting, I checked out the SEC but I couldn't find any new SEC filings for the company. I was able to find a '98 SEC filing, which was very interesting, but obviously outdated. So I now have a pretty good idea of how this business works (not complicated) but I'm working on a 5-year old business plan. I've looked at the PR numbers since, and this company has performed in every way.
My wife and I have vacationed in Mexico over the last decade, and this is one tough country to run a consistently profitable business in. In the 90's, 20% inflation and interest rates were routine and the peso jumped around like a Mexican jumping bean. We happened to be there during a currency devaluation one year and I wondered at the time how real businesses survive, never mind prosper, during these periodic monetary crises.
While reading about Bachoco's chicken business in 1998, I was struck by the fact that almost half of its chicken sales were live chickens. My guess is that as time goes on, a more 'value-added' product will be introduced in the Mexican marketplace. It doesn't appear that 'frozen' or 'precooked' chicken is going to take meaningful market share any time soon, or at least until the local population has the freezers and microwaves to put them into. I figure the first small step is selling an increasing share of a simple finished product (without feathers) to restaurants and supermarkets as the middle class inevitably grows.
I was not surprised by this businesses' cyclical nature, after all this is a basic commodity, but the seasonal nature of its sales did surprise me. I never thought in terms of people 'stocking up' on chicken for the holidays. The CEO stated, "Poultry and meat farming is a cyclical industry," Mondragon says, noting that demand is usually weak in the third quarter but that sales in the final three months of the year pick up as consumers stock up for Christmas."
The Nafta tariffs being eliminated don't strike me as being that serious of a threat, although Pilgrims Pride's CEO did say he planned on flooding Mexico with certain "parts". It appears that Americans like breasts a lot more than legs, and he sees Mexico as a nice market to dump the dark meat. After their recent mishap with the largest meat recall in US history, I don't think they are dealing from a position of strength. Also Mexico has refused chicken from a few US states because unbelievably they contain different strains of bacteria than the Mexican's aren't used to. (Montezuma's revenge in reverse.)
Mike, my one real fear here is shrinking margins. I think IBA fends off the attack from the gringos producing chicken up north and trucking it down. I think they know their markets better than anyone, and I don't see how the competition can produce it cheaper outside the country than in it. But I suppose if it's below their cost of production (because they are getting outsized margins on the white meat), a portion of the Mexican chicken market is prone to this disruptive pricing.
The bigger issue I have than the competition is the government's new policy on taxes. In the late 90's, I saw what higher chicken prices did to sales. A 15% VAT in a poor country will most definitely have an affect on sales. Any idea if this is close to being passed?
Also no small part of the wonderful Bachoco numbers is the fact they don't pay much in the way of taxes. Is the company vulnerable to losing its "simplified tax regime"? Rumor has it that Fox wants to get rid of it and make them pay their fair share. Any thoughts on this? I've never seen this tax structure before but I would love this scheme to continue. From my reading of it, they only pay taxes on the dividend that is upstreamed to the parent. In the SEC filing I read, they said they'd like to keep the dividend at 20% of net income (you mentioned 25%, so they probably increased it)...and they effectively ended up paying less than 4% annually in total taxes for all the years prior to '98. The other 75%-80% of earnings is retained tax free and a deferred tax liabilty is put on the books. As long as this is an ongoing business with no retroactive tax changes, that deferred tax liability is a liability in name only...and is actually a valuable asset. Mike, is this your read on this and is there any chance that the politicians badly damage the golden goose here?
|Subject||Comments and Questions (2)|
|Entry||10/29/2002 04:24 PM|
What's with the 5% of income that is allocated to a "legal reserve fund"? They have to keep tucking this away annually until it reaches 20% of the company's capital stock. What exactly is this thing and how is it accounted for?
The Nafta feed stock tariffs are not coming down for all grains...corn in particular is delayed for years. It struck me that Bachoco could have their largest production costs remain the same while Nafta opens up the tax-free gates for their finished product. How reliant is IBA on feed from the US vs feed stock that is sourced locally?
Do you have any currency concerns here? Almost all transactions are now done in pesos, so I don't suppose they have a need to hedge. The peso has actually been a strong currency the last few years but with Mexico one never knows how long it will last.
I was thinking if they were going to expand, going south may make more sense than going north, regardless of Nafta loosening the tariffs. They seem to run a very tight ship and would more easily be able to rationalize the very fragmented markets of Central America. Culturally, this is a much better fit. The CEO of IBA commented that they know their Mexican customers better than their northern competitors and will change the product according to regional tastes, which is the reason that Mexicans opt for the Mexican-bred provider. My guess is American consumers probably feel the same as their Mexican counterparts...and would feel 'safer' with an American-produced product.
|Subject||little to add|
|Entry||10/29/2002 05:20 PM|
|You know it all Jim.|
|Entry||10/29/2002 06:28 PM|
|Noticed that that my last post appears way too short - sounds like you reviewed the situation well, Jim. I do have some answers to most of your questions, but given your history and solid understanding thus far of the situation I know you've posed them to the company as well, and maybe you'll share them here on VIC? Wouldn't hurt to compare what I've got with what you get. |
|Entry||10/31/2002 11:01 AM|
|1) Mexican Peso risk... greater than 50% chance that the country devalues again given the low competitive advantage it now has in relation to other exporting emerging markets. |
|Entry||10/31/2002 01:33 PM|
|Proper exchange rates are widely debated, and tremendous fundamental arguments are so often propagated on both sides. While I don't mean to slight your view, very smart people who are usually right are massively wrong on currencies all the time. |
Besides, the peso risk can be hedged. This isn't Brazil.
|Entry||10/31/2002 04:46 PM|
|any idea who the large seller/s might be? since your idea was posted, over 40,000 shares have traded a day, or almost 20x the average daily volume of the past few weeks.|
|Entry||10/31/2002 05:24 PM|
|IBA is pretty sensitive to changes in the currency and to changes in the local share price. That is, changes in the local price adjusted for exchange rates are typically quickly reflected in IBA's price. |
I've noticed with this one and others that if you are willing to pay just above the price implied by the exchange rate and the local shares, you find decent sized sellers, maybe arbs in part. At the close today, the conversion price is slightly under 8.48.
|Subject||Price in Mexico|
|Entry||11/03/2002 01:50 PM|
Hi, Micheal --
One of the reasons that I have only a small position in IBA is that I've never been able to figure out why they are so cheap in Mexico. With some foreign comapnies -- Deswell, for instance -- I'm able to attribute part of the discount to the country-premium demanded by US investors. But that doesn't seem to be the case with IBA; you state that the ADR price is driven by the Bolsa price.
So why is it so cheap in its home country? Are the Bourses werewolves, or something?
|Subject||re: price in Mexico|
|Entry||11/03/2002 04:34 PM|
|I personally don't use the price in Mexico to tell me anything about the value of the business, much as I do not use stock prices in the US to tell me anything about the value of businesses. Multiples in Mexico do tend to be substantially lower than multiples in the US though, so part of it is a country discount, no doubt. After all, how many investors out there are just ignoring this idea because it is Mexican? Many many of my circle of contacts have done so. |
This is an illiquid security that often doesn't trade and is >80% controlled by its founding family. Mathematically, however, this investment cannot NOT work if the business continues to perform as it has historically. The multiple is just too low.
The risk is that the business does not perform as it has, or that management does something stupid with the excess cash (they have yet to do anything stupid with excess cash since the company has been public). However, this was supposed to be first year of tariff challenges, and the company is performing at record levels, as management has said it would. Management still claims they are prepared for any such challenges, and believes the business is continuing to improve.
Interesting you bring up Deswell. I have profited from owning Deswell in the past, and it is one of the cheaper companies out there. But, as you said, there is some country discount. As well, Deswell is small and IMO its current competitive advantage seems pretty easily threatened by any capital inflows into its area. IBA is clearly the leader in its industry in its country, and it has prospered even as TSN and CHX have made efforts in the country.
|Subject||Re: Price in Mexico|
|Entry||11/04/2002 03:09 PM|
Hi, Michael --
Again, I like the idea. I own some. I think it's cheap. I think it's stupid cheap.
But I've been reluctant to increase my position without knowing _why_ it's so cheap. I brought Deswell up because IBA is about as cheap as DSWL was during the meltdown of '98. But with DSWL, we at least knew why: "Asian micro-cap". The fact that the price is set on the Bolsa removes the possibility that sovereign/currency premia can explain a sub-2 EV/EBITDA ratio. The known negagtives -- illiquid, family controlled, maybe increased foreign competition, etc. -- don't seem to warrant that kind of price.
When something's this cheap, I don't worry about positive catalysts, only negative ones. That the Mexicans aren't buying this raises the possibility that the locals know something we don't. So I ask again -- Are the Bourses werewolves? Or what?
Just kidding, Mike. Thanks for the write-up. Knowing that someone else has looked this over without being able to find anything wrong may give me the confidence to pick up some more.
|Subject||elimination of chicken tariffs|
|Entry||11/20/2002 12:27 PM|
|does the company have any comment about the elimination of all chicken tariffs on January 1st, 2003?|
I was recently speaking with officials at CHX and TSN. My impression was that chicken prices in Mexico are significantly higher than the U.S. due to these tariffs. They feel that prices for chicken products may fall by up to half in mexico within the year.
|Subject||reply to my last message...|
|Entry||11/20/2002 04:37 PM|
|is not neccessary. I stopped being lazy and picked up the phone myself to get the information that I needed. Thanks for the idea on this stock!|
|Entry||11/21/2002 12:08 AM|
|I'd say the number one reason the stock is getting so little respect (besides being illiquid and Mexican) is the fear of what happens in 2003 with tariffs removed. I expect you received much the same response I did; resolution of this matter by the practical proof of what happens in 2003 will likely help the stock much higher within a year or so. At that point, investors will look forward to the positive effect of NAFTA on Mexican chicken producers - the weakening and removal of tariffs on imported corn (#1 operating expense). The appreciation in the stock should be substantial, IMO. In the meantime I doubt the dividend deviates from 25-30% of net income. |
|Subject||re: tariffs, this would help..|
|Entry||11/21/2002 05:03 PM|
|Dow Jones Business News|
Mexico Studies Safeguards Against US Chicken For 2003
Thursday November 21, 2:59 pm ET
MEXICO CITY -(Dow Jones)- Mexico's Economy Ministry said Thursday that it is studying whether the country's chicken industry, the fourth-largest in the world, needs safeguards ahead of the elimination of tariffs on imports from the U.S. in 2003.
|Subject||Tariff extension deal|
|Entry||12/30/2002 05:20 PM|
|This is good news. At the very least this maintains the status quo (and in reality it will help a lot), and at an adjusted PE of 2-3, I don't see how this doesn't work out. I expect that when the deal is closed there will be more fanfare, and maybe the stock reacts. Nevertheless, the dividend pays you to wait while value acrrues. Re: whole chickens, it's unlikely that IBA faces major competition from the US in whole chickens - the issue here is parts, which this deal would solve for now. My argument in any case is that tariffs have been falling for several years and IBA has been handling it very well, and IBA management insist that they will be able to handle even zero tariffs given their positioning. |
I had thought a potential catalyst would be a 2003 demonstration of how well IBA handles no tariffs, but I'll take this deal, of course.
From the WSJ today:
U.S., Mexico Close to Deal
To Extend Chicken Tariffs
By DAVID LUHNOW
Staff Reporter of THE WALL STREET JOURNAL
MEXICO CITY -- The U.S. and Mexico are working to head off growing complaints in Mexico that the North American Free Trade Agreement is hurting that country's farm sector.
The two nations are close to an agreement that will extend protection of Mexico's $2 billion chicken industry for another five years, industry and trade officials from both countries say. A deal is expected within weeks.
As Nafta reaches a major milestone on Jan. 1, when tariffs on some 80 agricultural products are eliminated, peasant groups in Mexico have vowed to block ports and customs offices within days if the government doesn't give the farm sector fresh aid in addition to $1 billion of recently unveiled subsidies.
Mexico's media have warned of a catastrophe in the countryside when trade protection ends in the new year. Mexico's farm lobby has hyped much of the controversy, despite the fact that for most products, such as sorghum and potatoes, trade is already practically free of barriers: Tariffs on those products and most others will disappear from only around 1%.
But the country's chicken industry -- the world's sixth largest -- may well be more vulnerable. Mexican tariffs on chicken are slated to fall to zero from 49% overnight. And the tariffs already have fallen sharply -- from 99% last year. There are other reasons to worry about the nearly one million Mexicans who work in the poultry industry, too. Because U.S. consumers prefer breast meat and pay a premium for it, U.S. chicken producers export legs and thighs -- which Mexican consumers favor -- at prices that sometimes are half what Mexican producers charge for them. Even with the tariff at 49% this year, U.S. producers sold about $130 million of chicken parts to Mexico , according to U.S. producers.
A deal between the U.S. and Mexico likely would raise tariffs on chicken parts such as legs back to 2001 levels of 99% for 2003, according to U.S. producers. Tariffs then would drop an average of 20 percentage points a year for five years until they reach zero. In return, Mexico would have to give up an equal amount of trade protection in other parts of the poultry trade, by lifting quotas on whole chickens or turkeys, for instance.
|Entry||12/31/2002 09:32 AM|
Hi, Michael --
I'm sure you've seen this already:
which may have some bearing on the "werewolf" issue.
|Entry||03/09/2003 11:13 PM|
This Bird's Dirt Cheap
Wednesday March 5, 10:44 am ET
By Bill Mann
Why did the Mexican chicken cross the road?
Because that's where the money is.
I know it sounds like a joke, maybe even a slightly derogatory one. But it isn't. The Mexican poultry market is the sixth-largest in the world and it continues to grow Â– and it's a profitable business for the few big integrated producers. American poultry heavyweights Tyson Foods (NYSE: TSN - News) and Pilgrim's Pride (NYSE: CHX - News) have built a large integrated facility in Mexico -- not for imports back into the United States, but for domestic consumption in Mexico. It's highly competitive, but it's a good business and, even under miserable conditions, the overall consumption of chicken in Mexico continues to grow -- up 5% in 2001.
In 1997, the largest chicken producer in Mexico, Industrias Bachoco (NYSE: IBA - News), came public after having operated as a family-run concern for nearly 45 years. The company is listed both in Mexico and in the U.S., and is still dominated by the Robinson Bours family, which controls nearly 80% of the stock. Bachoco controls a third of the Mexican poultry market, operating 700 different facilities throughout the country. It's a vertically integrated company, producing poultry-related goods from feed to branded chicken-related food products.
All of this likely sounds about as interesting as watching rocks. And seeing as this is a Mexican company, any expectations toward excitement for an investor in such a company might be perceived as negative. As in "Surprise! They devalued the peso!!" Not only is this a Mexican company, it's a Mexican chicken producer. Most folks wouldn't be interested in chicken producers unless the scientists bred 'em to shoot laser beams out of their beaks.
But nearly any company ought to be interesting to investors if it's cheap enough, unless of course it's in the process of going out of business. Bachoco is growing just fine, and yet it trades at a P/E of less than 4. It has a market capitalization of $390 million, but has more than $160 million in cash on hand. It has minimal debt, about $7 million. Put those all together and Bachoco has an enterprise value (market cap Â– total cash + total debt) of $237 million. From this base the company generated more than $122 million in operating cash flow, giving it a multiple of enterprise value to operating cash flow of less than 2. Free cash flow, the amount of money left over after it invested in new capital expenditures, exceeded $80 million. Rather than keep all of this generated cash, Bachoco has traditionally paid out between 20% to 25% of net income as a dividend -- its current yield is nearly 7%. Its price to tangible book sits at under 0.5.
So, you have a company that is growing market share, producing gobs of cash, is essentially debt free, has a dominant position in its market, and is paying a massive dividend -- all available for multiples generally accessible only to the walking dead. What gives?
Well, plenty, but it's not enough to outweigh a pretty neat, dirt-cheap investment idea, I believe.
Run to the peso?!?
Bachoco is a Mexican company, it is tied to the Mexican economy, it deals in Mexican GAAP, its currency is appropriately named the Mexican peso. If you invest in Bachoco in the U.S., your investment will be in dollars. In the course of history, it has been exceedingly rare for the peso to increase in value to the greenback and, in fact, most people can recall one or 37 instances when the peso was suddenly devalued against the dollar by a substantial amount -- meaning Bachoco would have to grow faster than the rate of peso depreciation for its growth to be meaningful to you. My favorite euphemism in the Bachoco annual report? Conversions in "constant pesos." Like there's ever been such a thing.
NAFTA has done a great deal to open up the American (and Canadian) markets to Mexican industries, and vice versa, for which the comparative advantages of each market has definitively brought substantial economic benefits. But the market perception is that there is a much higher chance of continued gradual or sudden drop in the peso value against the dollar than the other way around. Certainly this is a reason to stay away from Mexican stocks (or most emerging market equities) in general. Couple this with the fact that Bachoco doesn't have U.S.-based operations to give it a natural currency hedge -- unlike my Stocks 2003 idea, Mexican cement producer Cemex (NYSE: CX - News) -- so the peso issue is simply part of the deal.
The movie is Bachoco, your role is "Boy #4"
Bachoco's board of directors is stocked with members of the Bours family, including both the chairman and vice chairman. As with any company, dominance by one family could be a blessing or a curse. If that family is, for example, the Buffetts of Berkshire Hathaway (NYSE: BRK.A - News), the minority shareholder can rest easy that they are considered partners. On the other hand, if you happen to end up holding stock in a company dominated by folks named Rigas, best use the heavy-gauge wallet chain. Nothing at Bachoco happens without the blessing of the Bours family. And Mexican corporate governance standards allow for substantially different treatment of minority investors than do American ones. The Bours family has proven to date to be shrewd with the corporate nickel.
|Entry||03/09/2003 11:13 PM|
|Like Linus and his blanket... |
A NAFTA provision states that certain agricultural tariffs would fall by Jan. 1, 2003. The Mexican poultry industry lived in terror that the fall of the near 50% tariff on American chicken would cause cheap American chicken legs to flood their market (apparently, we Yanks consume substantially more chicken breast than other parts, leaving the rest to go to waste). This would, of course, force the market price downward in Mexico. Good for Mexican consumers, not so great for producers.
The Mexican government renegotiated this deal to allow the first 50,000 tons of American chicken leg quarters in duty free over a six-month period, with any additional being socked with a 100% tariff. This tariff will be gradually reduced over the next few years. Though the effects on Bachoco's bottom line are unknowable, it's a near certainty that a more open market will have an impact on it.
Finally -- and this is something the company is trying to improve -- information about Bachoco is a little difficult to come by. Its 20-F statements, the SEC forms required for foreign issuers, are available as paper copy only. You would have to request a copy from Bachoco itself. The company does not do conference calls, though it is considering them for the future. Given that it has little exposure in the U.S. and it comes from a country and an industry that many investors do not go out of their way to understand, anything Bachoco can do to improve its corporate communications should pay off. Its annual report presentation is pretty straightforward (the chicken business is fairly easy to understand). And to its credit, Bachoco does have a zippy, informative website, complete with a bowing chicken.
I don't believe the issues facing Bachoco spell disaster for the company or its investors. Not even close. It has gone to great lengths to build its brand in chicken and its new lines of chicken broth products to help it fend off the commoditization of its core products. It's also greatly expanded its production of eggs, now 10% of the company's revenues, as well as chicken feed. The low stock price seems to me to represent a sort of general negativity over Mexico rather than any fears about company sustainability. Sometimes the markets really do deliver nice opportunities to you -- a company generating heaps of cash at a reasonable, or better, multiple. This may be such a case.
|Entry||04/16/2003 06:49 PM|
|Anything new in the land of mexican chicken farms? Shouldn't we be due for a dividend?|
have they taken their act to Wall St. yet?
|Entry||05/05/2003 10:04 AM|
|Nothing has changed - 1Q results are out and we see cash going up, cash flow going up, debt going down. Any negatives have got to be in the price, which seems to get cheaper with every earnings release. Dividend record date this month I believe. Nearer 20 still seems like a reasonable target. |
|Entry||05/05/2003 09:25 PM|
|Could you please comment on the decline in net income in the 1Q versus last year. Do you believe this trend will reverse during the rest of this year? Also any idea why the stock has run up the last few days? |
I just came across your write-up and have just started researching the idea. It looks very interesting. Do you have any other update since your post? What is your price target for the stock and over what time period?
|Subject||re: 1Q results|
|Entry||05/06/2003 12:34 AM|
|Check the large non-cash one-time gain in last year's 1Q. |
I think everything is going swimmingly. Stock has been held back by perception that tariff issues will hurt it, yet even as the tariffs have come down on chicken imports and as the tariffs have stayed high on corn, IBA continues to produce tons of cash and has a sterling balance sheet and terrific industry position. In a few years, the corn tariffs go away too, so in time the temporary cloud hanging over the stock goes away and the market anticipates a cloud-free environment.
|Entry||09/17/2003 05:20 PM|
|Any thoughts on the tariff settlement. Seems like a huge plus that the market is completely ignoring. Also, what about the cheaper feed in a few years? Is that still on track?|
What is every one's feelings on expansion? Clearly they are going for marketshare by moving to increase production capacity by 50%. Can this potentially kill margins if suddenly the industry reaches overcapacity?
|Entry||09/18/2003 02:37 PM|
|We had a call with the CFO back in March. We were told that the expansion was driven by a desire to export chicken breasts to the US, as opposed to increase marketshare in Mexico. Company aims to increase market share in Mexico, but the plan is to do so by acquiring small Mexican chicken farms.|
For what it is worth, managmeent told us that acquisitions/expansions are targeted to earn 13-15% a year on invested capital (not sure if this is a pre or post-tax figure).
|Entry||11/08/2004 07:51 PM|
|Michael, what's your thinking now? Chicken and egg prices are falling, but so are feed prices. Is IBA cheap or expensive?|
|Entry||08/01/2005 06:09 PM|
Hi, Michael --
Well, so much for the "vampire" theory. Nice pick!