One Way to Hedge Against Food Inflation
It’s the first week of August, and this summer’s weather has been wild, to say the least. It is estimated that over two-thirds of the continental United States is currently in some form of a drought, pushing corn, soybean, and wheat prices to record highs. The National Oceanic and Atmospheric Administration has recently reported that the first half of 2012 is the hottest half-year in recorded history; unless zombies come bursting through your door, this may be what the Mayans predicted all along.
Now, with similar forecasts on the horizon, meteorologists are predicting that the country’s driest areas won’t see relief until October at the earliest. That’s bad news for the consumer, as higher grain prices will undoubtedly affect the cost of other food groups, like milk and meat for example. Aside from waltzing into the nearest Sam’s Club and stocking up on essentials like a crazed survivalist (like this), there are ways to hedge against this looming inflation, particularly in your portfolio. Below is one such stock that may see its fortunes rise in step with your grocery bills.
Bunge Ltd (NYSE: BG)
In 2012, shares of BG have returned a cool 14.4%, outpacing the farm products industry average (-10.7%), and floundering competitors like Archer-Daniels Midland (NYSE: ADM), Tyson Foods (NYSE: TSN) and Brasil Foods SA (NYSE: BRFS). Archer-Daniels, Bunge’s closest U.S. peer, recently reported its fourth quarter earnings and they were a doozy. When the dust settled, ADM’s year-over-year net profit had fallen by an astounding 25%, as diminishing corn supply severed its ability to export grain outside of the U.S.
While bears may point to the fact that Bunge faces an inherently similar situation, they are forgetting that the company has a significantly larger footprint in South America, where prices are more subdued. In its most recent earnings report, Bunge still reported a YOY profit decline of 13%, though this beat the Street’s estimates, albeit slightly. By year’s end, analysts are expecting BG to clock in an EPS of $6.27, an 8.1% increase from the $5.80 it reported in 2011. Next year, consensus is forecasting a spike of 16.3% to $7.29 a share, which would be a larger jump than ADM (10.7%) and TSN (0.05%) combined.
From a valuation standpoint, it appears that Bunge is undervalued at current price levels. With a Price-to-Earnings ratio of 13.3X, the company’s earnings are cheaper than industry norms (14.2X), and its own 5-year (13.8X) historical average. Despite its rosy EPS outlook, the stock is also trading at a PEG (0.9) bordering undervalued territory, below the likes of ADM (1.0) and TSN (1.2), and on par with BRFS (0.9). Much to the delight of income investors, the company recently announced a cash dividend of $0.27, amounting to an estimated yield of 1.65%; this is below ADM (2.74%), but above both TSN (1.04%) and BRFS (0.0%).
With a share price in the $65 range, Bunge is valued at 84% of its book value. Compared to ADM (91%), TSN (94%), and BRFS (172%), BG should provide healthy capital appreciation at a relatively cheap price. Protected by its global diversification, the company can actually capitalize on rising grain prices without being caught in a dreaded supply glut. If the Street’s 2012 earnings estimates are met, fairly valued shares of Bunge have an upside of $85, with the chance to eclipse $100 a share if longer-term forecasts hold. WealthLift’s Sentiment Index rates BG as a strong buy, with the majority of the community’s users placing an “overperform” rating on the stock.
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Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.
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