Latin America’s Most Profitable Poultry Firm Seen as Winner

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The poultry producer with the biggest increase in profit this year in Latin America is being undervalued in the Mexican stock market, leading many analysts to call the company a winner for shareholders.

Industrias Bachoco SAB, Mexico’s largest chicken producer, had a 27 percent increase in profitability compared with a year ago. It was the best performer among the top 10 largest packaged food companies in the region, including BRF SA, JBS SA, and Grupo Bimbo SAB, according to data compiled by Bloomberg. Bachoco has a price-earnings ratio of 9.45, the lowest among the 10 companies, which have an average P/E ratio of 22.3.

Bachoco, the seventh largest North American food packaging company by market value, is benefiting from stronger chicken demand and lower corn and grain prices in Mexico and U.S., according to Mauricio Martinez, equity analyst at Corporativo GBM SAB. Bachoco, which returned 222 percent since 2012, has gained 16 percent this year.

“Bachoco is benefiting from the two principle variables in the chicken industry: the prices of chicken and the price of grains,” Martinez said in phone interview. “There is always a risk of fluctuation, but we continue to see considerable value in the company that is not currently reflected in the share price.”

Bachoco fell 0.1 percent to 71.78 pesos in Mexico City.

Global Competitors

Bachoco’s profitability is the highest since 2013 while the average margin of 108 global competitors has fallen to the lowest since at least 2005, according to data compiled by Bloomberg. With lower chicken prices in Mexico and the U.S., Bachoco’s focus on poultry benefits the company at a time when beef and pork prices are high, according to Kenneth Shea, a food and beverage analyst with Bloomberg Intelligence.

“Near term, things couldn’t be much better for chicken processors,” Shea said in a phone interview from Skillman, New Jersey. “The way consumers are shopping right now they seem to perceive chicken as a more healthy and economical choice.”

Bachoco has six buy and one hold recommendation according to seven equity analysts surveyed by Bloomberg. The shares are forecast to gain about 14 percent over the next year. The company earns about 84 percent of its income from poultry, Fernanda Simon, an analyst at Intercam Casa de Bolsa, wrote in a June 12 research report.

“Chicken prices are relatively low as a protein against the biggest competitors such as beef and pork,” Shea said.

Corn, Grain

In addition to increased poultry demand, Bachoco has improved profitability on lower corn prices this year, Brian Flores, senior equity analyst at Interacciones Casa de Bolsa SA, said in an e-mailed response to questions. Corn prices have fallen about 16 percent in the past year as global output approaches a record high.

“Despite benefiting from external factors, the market share and distribution and efficiency ability of its plants has allowed the company to create a stronger brand value,” Flores wrote.

Bachoco said it controls 35 percent of the chicken market in Mexico and 5 percent of the egg market. Demand for chicken in Mexico, one of the world’s top 10 poultry producers, increased 4 percent last year while rising 2 percent in the U.S.

The company’s net income increased 91 percent to 1.26 billion pesos ($81.6 million) and sales increased 18 percent to 11.4 billion pesos in the first quarter, thanks in part to an improved market, Chief Executive Officer Rodolfo Ramos Arvizu said in the April 23 earnings statement.

Poultry Demand

“The factors that are helping us are the high level of demand for poultry products in Mexico and the U.S. and a reduction of the costs of our raw materials,” Bachoco’s Chief Financial Officer Daniel Salazar Ferrer said Wednesday in an e-mailed response to questions.

The lower corn price is “definitely one of the factors that is helping the company’s results,” he said.

Bachoco, which has 1,285 locations in Mexico and the U.S., is planning to invest as much as $130 million in plant expansion this year, three times the amount of previous years, according to Intercam’s Simon. The Celaya, Mexico-based company purchased Fort Smith, Arkansas-based OK Foods Inc. in 2011.

The poultry producer is controlled by the billionaire Robinson Bours family, with a 73.25 percent stake held through family trusts, according to the company’s annual report. The clan’s stake is worth about $2 billion.

The company is “looking closely for any opportunity” in terms of a merger or acquisition, Ramos Arvizu said on a Feb. 5 call with investors. Bachoco sees “positive opportunities in South America and Latin America in general and in the U.S.,” he said.

Fund Manager

“It is in a very good position to take advantage of synergies and consider a potential acquisition,” GBM’s Martinez said. “The company continues to generate a lot of cash which could allow them to make a significant purchase in the short or mid-term.”

Mexico’s best performing fund manager, GBM 103 SA de CV SIRV, cut more than half of its holdings in Bachoco since last year while maintaining shares in other national food production companies such as Grupo Minsa SAB and Grupo Bafar SAB. The company’s strong performance faces the risk of grain price volatility and disease outbreaks in crops or animals, according to a June 4 research report by Mexico City-based Signum Research.

GBM did not immediately respond to telephone calls seeking comment.

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