Bunge Is Underpricing Its Own Assets

I’ll let you in on a little secret. Bunge’s assets are being heavily discounted in their financial reports.

They admit to as much themselves, under their explanation of pricing inventories.

Of their $6.7 billion in inventories, the preponderance (about $4.3 billion) are carried at fair value. However, the remaining inventories are not.

Most of Sugar & Bioenergy, Edible oil products, Milling Products, Fertilizer, and a small portion of the large Agribusiness line, are carried at the lesser of cost or market value. What this means is that, in a market such as this where agriculture products are increasing so dramatically, the most the company is ever acknowledging is what its resources cost.

What they cost, not what people will pay for them.

Excluding the edible oil and milling segments for a moment, what are the odds that inventories from their other lines of business are being fairly accounted for?

Sugar is held at fair value, but bioenergy is almost certainly being under reported in this high fuel cost environment. Agribusiness is where most of the action is at; yet there is almost $700 million worth of inventory being held, at best, at what it cost to acquire them. And the fertilizer division is the most intriguing of all.

Fertilizer inventories, all $777 million of them, are carried at the lower of cost or market. So how much are those $777 million really worth right now?

The price of fertilizers has tripled in the past decade. Something to keep in mind; I had created a graph, but my computer is blowing up, so you’ll have to use your imagination. Imagine a line starting at 1 and then zigzagging to 3, right now.

Do it.

There is no way that BG’s Fertilizer division is only worth $777 million. Not a chance.

And as for the lines of business where the environment is unfavorable, like the edible oils and milling products, well…they’re already carrying those at or below real value. There’s no surprise left in that.

The bottom line numbers for BG were phenomenal this past quarter. The company’s intrinsic worth has advanced past $77 per share, the level where I calculated it based on last September’s numbers. Their most recent earnings of $1.49 work out to roughly 2% per quarter.

That’s the lowest they’ve been since the third quarter of 2010.

Plus, those earnings have been growing at an average 5 year rate of 27%. That’s even after they succeeded in shooting themselves in the foot in the early quarters of 2010 and beyond.

And the party is not stopping for Bunge any time soon, as they have locked in the current prices in the markets with over 4 million contracts, futures or otherwise. These margin levels will continue for the foreseeable future. I fully expect Bunge to perform for at least another two years as static labor contracts, controlled input prices, and historically low grain reserves of potential buyers take them home.

The final conclusion is that BG is terribly undervalued.

They are undervalued because they trade at a steep discount to their book.

They are undervalued because that book value is calculated using extreme discounting, making the situation even more ridiculous.

They are undervalued because they trade at a steep discount to strong earnings growth.

They are undervalued because they are reaping full reward of this environment and its opportunities.

And they are a must own for me.

Just how undervalued is BG?

Well, that depends on the profitability of their inventories, of course. But to get a feel for it, let’s just look at the business with theoretical profit margins of 10%, 20%, and 30%. (As an aside, I have no idea as to the actual mark downs of their holdings, and just looking at the price of fertilizers, grains, etcetera, I’d guess that the profitability could be much higher. As a rule, each 1% of error seems to add about $0.10 to the value of the shares.)

On what we’ll just say is $1.5 billion worth of “questionably priced” inventories (itself an underestimate), that would leave us with $150 million, $300 million, and $450 million worth of uncounted value.

Thus, the real intrinsic worth of the shares is more likely somewhere between $78 – 80, using just modest assumptions. That is without considering (as crazy as this must seem) that BG as a performing and valuable company, should perhaps trade at a premium to its book, as opposed to a discount of it.

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