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Pencils Fund Purchase: Sadia
Purchase Price: $26.98
Purchase Date: 9/13/06
Shares Purchased: 7
Commission: 0
Business
Sadia offers processed products, poultry, pork, and beef primarily refrigerated and frozen in Brazil. Processed, refrigerated, and frozen products include frozen foods, hamburgers, pizzas, pasta, breaded products, and ready-made dishes. Sadia also breeds, slaughters, and distributes poultry and pork, and offers beef. Sadia has 12 Brazil industrial plants that produce 1.3 million tons of protein-based products all over the world, and they are Brazil's main exporter of meat-based products. Sadia has many customers: 70,000 direct customers in Brazil and 200 foreign clients. Remember that Brazil is one of the fastest-growing economies today, so Sadia has some great exposure to this nicely-expanding country. Sadia was founded in 1944, and is a market leader in all of its segments.
Financials
Some quick financials:
Market Cap 1.87B
Enterprise Value 2.35B
Shares Outstanding 68.05M
Float 43.05M
Employees 45,381
Total Cash (mrq) 1.18B
Total Debt (mrq) 1.69B
Qtrly Rev Growth (yoy) -14.70%
Revenue (ttm) 3.18B
Gross Margin (ttm) 25.25%
EBITDA (ttm) 369.15M
Oper Margins (ttm) 6.56%
Profit Margin (ttm) 6.40%
Net Income (ttm) 203.38M
EPS (ttm) 2.99
P/E (ttm) 9.06
P/S (ttm) 0.57
Book Value Per Share (mrq) 15.36
Return on Assets (ttm) 5.75%
Return on Equity (ttm) 20.96%
Forward Annual Dividend Yield 5.90%
The cash/debt position could be better, but Sadia has been increasing net income and margins over the past three years, so I think they will be fine with bringing money in and paying off debt. Notice the low P/E ratio (just above 9). The industry average is 18. Why does Sadia have such a low P/E? You probably guessed it, bird flu fears. These fears have been overdone (at least that's my belief), for several reasons: 1. There has been little movement or news of the bird flu over the past few months; and 2. The bird flu hasn't been even close to Brazil! Yet for some reason, even though the bird flu isn't close to Brazil, Sadia's stock has been knocked down over the past year, and this is why I like this opportunity.
Also, notice the 5.9% dividend yield. That is one hefty dividend, and it has been raised a good amount since the company went public in 2001. I will be reinvesting future dividends into the business, because I really like the looks of Sadia over the long-term. But this large dividend is a good shield against a downturn, it makes this already cheap stock an even better one. Because of the bird flu fears, sales have been hurt temporarily, but I am confident that in the long-term Sadia will more than recover and continue to deliver satisfactory results.
As was mentioned earlier, Sadia is a leading exporter. They export to over 65 different markets, has 14 distribution centers in Brazil, and has offices in many other countries, including China, Japan, and Italy. So, they are already in a fast-growing economy, but they are also getting exposure to other areas of the world. Let's just say they have a very diversified product line and customers.
What to Look For
-- Debt; I'm hoping that Sadia will be able to pay off their long-term debt without diminishing their cash, and it will be something I'll keep a close eye on. I also want to make sure they don't rapidly increase their debt, because that is something that can keep a company from meeting expectations. I think Sadia is in a long-term position to keep paying off debt without depressing the cash amount too much, but it will be something to watch.
-- Expansion; Sadia is already in many areas of the world, but I don't want them to continue to rapidly expand, simply because I don't think that is the best strategy. I don't think this will be a problem, because Sadia is very experienced in their field, so I'm confident they will be smart with expansion. I like expansion, but not when it is rapid. That's usually a sign that a company is desperate for something, which usually means that it's a company not worthy of your investment money!
-- Bird flu; As much as I don't want to say this, it will be something to watch in the short-term. If it does show up near Brazil, this stock will be hammered even further down (making an even better opportunity). Short-term, a bird flu finding will hurt Sadia, long-term I don't think it will be a problem. But it will be something to be up-to-date with.
Competition
Perdigao is Sadia's main competition, as they are another meat company in Brazil. But, they have a P/E 2 1/2 times higher than Sadia, Sadia has three times more income, Sadia has better margins, yet they are nearly the same size. Sadia is much more undervalued, at least after my research, and I think Sadia is the better company and long-term investment. I don't think any of Sadia's competition is a huge threat to the business, but it is important to make sure Sadia continues to be a unique-enough company to beat off the competition. I'm convinced that they are doing the right things for the long-term.
Valuation
Let me start this section by saying that Sadia has no analysts following the stock, making it an even better opportunity. I'm not real sure what reasonable expectations are, but I do know a higher P/E is deserved for Sadia. I'm going to say 20% annual growth for the next five years will be my top estimate, 17% my most-expected estimate, and 15% for my not-at-all-expected estimate. With those rates, I will use a P/E of 18 (industry average), 14 (approximately half-way between its current P/E and industry average), and 9 (today's P/E). Current EPS is 2.99. Here we go:
High estimate:
2.99 * (1.2^5) * 20 = 148.80
Medium estimate:
2.99 * (1.17^5) * 14 = 91.78
Low estimate:
2.99 * (1.15^5) * 9 = 54.13
And a low, I-can't-imagine-estimate just for the heck of it (growth rate of 12% and a P/E of 7):
2.99 * (1.12^5) * 7 = 36.89
So, I think we'll see at least a double in five years, and I plan to hang on to this company for many more years after that. People will always eat food, and Sadia is a leading producer of meat, which is quite a popular food, so I think this current valuation is very undervalued. It's great to be in a market that gives great companies with a very cheap price. Luckily, I've had a little bit of cash to take advantage of these opportunities!
Conclusion
I think Sadia is very attractive at these levels, and I think it will be a great long-term investment. They are in a fast-growing economy, a very experienced business, a leading exporter, with food products that we will (unless something unusual happens!) continue to eat for years into the future. I was actually going to invest in another company, but when this opportunity popped up there was no way I could resist putting my money into it. A strong, increasing dividend, improving margins, no analysts following the company, an experienced company, and a knocked down share price on something that I believe is very overdone. What's not to like for the long-term?
Tags:
bird flu, business, investing, pencils fund, sadia, stocks, valuation
Posted at: 07:38 PM | Add Comment
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