JBS SA (JBSS3), the world’s largest beef producer, is set to post the highest quarterly profit since 2008 as Brazilian meatpackers are shielded from surging grain and cattle prices that eroded the margins of global peers.
Third-quarter net income will be 331.8 million reais ($164 million), compared with a year-earlier loss of 67.5 million, according to the average of four analyst estimates compiled by Bloomberg. JBS’s 19 percent return in the past three months makes it the world’s third-best performing meatpacking stock, after Barretos, Brazil-based Minerva SA and Marfrig Alimentos SA (MRFG3), which gained 44 percent and 38 percent, respectively.
Global grain and cattle prices are soaring following the worst U.S. drought in 56 years. While U.S. ranchers rely on corn and other grains to feed livestock, Brazil’s herd is mostly grass-fed. Sao Paulo-based JBS also has been shielded from rising cattle costs after Brazilian prices on Aug. 14 fell to the cheapest relative to U.S. prices in five years.
“Brazil is in a sweet spot for the next 18 months,” Eric Conrads, who helps manage $1 billion in stocks at ING Groep NV in New York, said by telephone. “Brazilian cattle are grass-fed so you don’t care about corn.”
Corn and soybean prices reached records since mid-June amid the U.S. drought. Corn rose to $8.38 a bushel on Aug. 21 from $5.05 on May 11, while soy touched $17.68 a bushel on Sept. 4 from as low as $12.58 on June 1.
Rising grain prices probably will drive farmers to increase production next year, averting food shortages, Greg Page, chairman and chief executive officer of Cargill Inc, said in a Sept. 24 interview. Cargill dominates the U.S. grain market along with Archer Daniels Midland Co. and Bunge Ltd.
Tyson Foods Inc. (TSN), the largest U.S. meat processor, will report net income of $160 million for the fiscal quarter ended Sept. 30, up from $97 million a year earlier, according to the average of seven analyst estimates compiled by Bloomberg. Tyson shares have lost 11 percent in the past three months. The company cut its full-year sales and profit forecast amid rising feed costs, it said Aug. 6. Revenue will be $33 billion in the year through September, compared with a previous forecast of $34 billion, the Springdale, Arkansas-based company said.
An official for JBS, who requested anonymity citing company policy, declined to comment on the company’s earnings. Quarterly earnings may be released Nov. 14, according to data compiled by Bloomberg.
Brazilian producers are also benefitting from the real’s 7.9 percent decline against the U.S. dollar this year, which boosts profits from exports and overseas operations in local- currency terms. That has been countered by higher costs for items denominated in U.S. currency.
“The dollar is helping exports, but so what? The world is in a crisis and demand is sluggish,” Caue Pinheiro, an analyst with Sao Paulo-based SLW Corretora, said in a telephone interview. “Also, the crisis reduces their ability to pass on price increases, especially in the U.S.”
JBS still needs to deal with its high level of debt, which makes it a less appealing investment than local peer Minerva, Conrads said.
The company’s debt ballooned since 2005 as brothers Joesley and Wesley Batista, whose father Jose Batista Sobrinho founded JBS in 1953 by opening a slaughterhouse, started to expand outside of Brazil with 16 acquisitions since then, including Pilgrim’s Pride Corp. (PPC), Swift & Co. and Tasman Group Services.
Net debt was 15.3 billion reais in the second quarter, up 25 percent from a year ago. Debt is at 4.3 times earnings, excluding items, from 3.6 times a year ago.
The large debt load is now being addressed by JBS as the need for mergers subsides, said Henrique Koch, an analyst with Banco do Brasil SA.
“It seems that JBS pushed back on acquisitions and is focusing on efficiency,” Koch said in a Sept. 27 telephone interview from Sao Paulo. “That’s good news, they are doing their homework. They are set to keep improving as they increase capacity usage at their Brazil beef plants.”
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