Brazilian beef packer Marfrig Global Foods SA (MRRTY, Financial)(BSP:MRFG3, Financial) is down due in part to the weakness of the Brazilian markets and thoughts that beef prices will not be as strong as in the recent past. Morgan Stanley is bullish on the stock and believes we are in a global beef super cycle, with increased imports from China and weaker production in the U.S. The stock trades for 12.24 reals ($2.26), there are 660.27 million shares and the market cap is 8 billion reals.
Sales were 48.7 billion reals in 2019, 67.5 billion reals in 2020, 85 billion reals in 2021 and 90.5 billion reals for the trailing 12 months. In 2019, earnings per share were 0.35 reals. The company recorded earnings per share of 4.72 reals for 2020 and 6.42 reals for 2021. You can see the growth has been great.
Morgan Stanly loves the beef industry and recommends Marfrig, Minerva (BS:BEEF3) and JBS SA (JPSAY) as core holdings. The investment bank estimates free cash flow yields (free cash flow divided by market cap) of 25% for the three. Marfrig’s price target from the investment bank is 38 reals. That is a lot of upside if this estimate comes true.
The investment bank also thinks the world is in a beef super cycle—there just is not enough beef out there. It sees the U.S. scaling back production by 3% and China increasing imports by 10%. China’s appetite for beef is incredible. It has grown imports from 12% of global trade five years ago to 32%. The analysts also think labor shortages will remain tight in beef production and portend higher profit margins for beef packers.
The risk for Marfrig is that its 100% beef and 85% U.S. beef. It is trying to mitigate this risk with a one-third purchase of BRF SA (BRFS, Financial), which produces pork and chicken but no beef. BRF’s market cap is 16.4 billion reals, so Marfrig’s stake is 5.5 billion reals.
Marfrig’s balance sheet is strong. The company holds 5 billion reals in cash, 2.5 billion reals in receivables and 5.5 billion reals' worth of BRF stock. This is compared to 3.9 billion reals in accounts payable and 32.3 billion reals in debt. S&P upgraded its bonds to a BB+ rating.
What’s funny about Marfrig is it received 71% of sales fromm the U.S. in the last quarter and 85% of its Ebtida. In other words, it is basically a U.S. company from its ownership of National Beef. Were it listed in the U.S., it would not trade at such a large discount.
The brains behind Marfrig is Brazilian beef tycoon Marcos Molina. He has become chairman of BRF. I remember when Leucadia National purchased National Beef for $868 million. When Leucadia’s successor, Jefferies (JEF, Financial), sold its shares, the company reaped a 3.3 times profit of $3 billion. Amazing.
Obviously the big risks with Marfrig is beef prices and the Brazilian stock market. Both are incredibly difficult to gauge. If China ever decided to put on more beef import taxes, it could hurt the cattle markets.
I like the stock, but have not bought shares. It looks like it is starting to bottom (famous last words). The stock decoupled from the Brazilian market last fall and rose with cattle prices. However, it rejoined and fell with the Brazilian market this year. If cattle prices stay relatively strong and the company passes on the dividend to investors, it should drive the stock.
