JBS SA (JBSS3), the worst-performing stock among meat companies in the Americas this year, is now forecast to post the biggest rally as the maker of Swift steaks says cheap Brazilian cattle will drive profit growth and reduce debt.
Shares in the supplier of restaurant chains from McDonald’s to Outback will gain 42 percent in the next 12 months, the most among beef producers worldwide, according to the average of 17 price estimates tracked by Bloomberg. The stock has lost investors 13 percent this year compared with Tyson Foods Inc. (TSN:US)’s 3.7 percent decline, according to data compiled by Bloomberg.
“Beef margins in Brazil will keep rising going forward,” Chief Executive Officer Wesley Batista, 42, said in a Nov. 30 interview at the company’s headquarters in Sao Paulo. “Add to that the outlook of lower grain prices, which will help Pilgrim’s Pride, and you have a good year ahead.”
Batista, whose father Jose founded JBS in 1953 by opening a slaughterhouse, expects to lower the company’s ratio of net debt to earnings before items to “the low 2s” by 2014 from 3.7 at the end of the third quarter by containing costs and widening profit margins. JBS will benefit as expanding herds in Brazil reduce cattle prices, while in the U.S. it can pass on higher U.S. chicken and cattle prices to customers, he said.
Shares dropped 2 percent at 10:51 a.m. in Sao Paulo today, amid news that a cow that died in Brazil in 2010 carried the causing agent of mad cow disease, “but hasn’t manifested the illness nor died because of it,” according to a statement released by the country’s ministry of agriculture today.
JBS swung to a profit from a loss in the third quarter, mostly because of sales of its Brazilian beef unit. The stock trades at 33 times trailing earnings, compared with 10 for Tyson.
“I’m excited about the company’s outlook,” said Eduardo Carlier, head of core equities at Schroder Investment, which manages about 3 billion reais ($1.4 billion) in shares including JBS. “Taking into consideration that debt levels are the main concern surrounding JBS, the positive cycle for cattle in Brazil and a strong dollar that helps exports should allow the company to deleverage,” he said Dec. 4 by telephone from Sao Paulo.
The company’s debt ballooned since 2005 to 15.2 billion reais at the end of the third quarter as the Batista family started to expand outside of Brazil with acquisitions including Pilgrim’s Pride Corp. (PPC:US), Swift & Co. and Tasman Group Services. JBS had losses in the past two years and hopes to be “in the black” this year and next, Batista told reporters Nov. 14.
Net income probably will surge to a record 1.53 billion reais next year from 998 million reais this year, according to the average estimate among analysts tracked by Bloomberg.
High Grain Prices
“The larger supply of cattle in Brazil is positive, but I don’t see debt leverage declining as rapidly as I would like it to,” Viktoria Krane, a director at Fitch Ratings, said Dec. 5 in a telephone interview from New York. “Cash-flow generation tends to be neutral to slightly negative going forward in 2013 because of the lasting impact of high grain prices.”
Corn reached a record $8.40 a bushel in August and soybeans touched an all-time high of $1.7835 a bushel in September amid a U.S. drought that parched fields. Both commodities have since plunged at least 9.7 percent through yesterday as South America prepares to reap bigger crops.
Fitch rates JBS bonds a BB-, or three levels below investment grade, and has a negative outlook on the company’s debt.
Record prices for corn and soybeans eroded margins for the beef and poultry units in the U.S. and may still affect results this quarter and next because it typically takes time for chicken and cattle raised on expensive corn and soybean meal to reach the market, said Pedro Herrera, an analyst with HSBC Holdings Plc.
Worst Not Over
“The worst of Pilgrim’s Pride is yet to come, but I think the Brazilian beef unit will offset some of the weakness of the U.S. business,” Herrera said in a Dec. 5 telephone interview from Sao Paulo “If you put things on a scale, it’s going to be an average year for JBS, which is good.”
Batista said normal weather conditions in the U.S. Midwest next year should further reduce feedstock costs and, combined with the outlook for cattle prices in Brazil, improve margins. Expected sales growth of at least 10 percent will be fueled by the startup of its new plants and higher capacity usage, rather than additional asset purchases, he said.
The company is expanding in Latin America’s biggest economy by starting six beef plants next year.
“We’re not in a mood to do big acquisitions,” he said. “Now it’s time to reap the benefits from synergies after all the acquisitions in past years.”
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