JBS: Positive Momentum And Attractive Valuation

seekingalpha06-23

JBS is the largest animal protein company globally, with a robust business model, geographic diversification, and strong relationships with farmers and distributors.JBS has good operational indicators...

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Brazil is a powerhouse in agribusiness, and JBS knew how to take advantage of this competitive advantage. The company has expanded globally, and its geographic diversification mitigates country-specific risks and brings less volatility to results. JBS has excellent financial indicators, and the valuation contains an appreciation potential of 18.6%. Additionally, the company is experiencing very positive momentum due to better operating results, which has been reducing its leverage. Introduction With the growth of the global population and greater urbanization, the demand for food has increased significantly, especially in emerging countries. Brazil is extremely competitive in agribusiness, being the largest net exporter of food in the world. Net Export Value (USDA And BTG Pactual) In the meat market the trend is also the same. Brazil is expected to remain the largest beef exporter in the world, exporting 3.4 million tons of beef in 2024, which represents 30% of Brazilian production, and JBS is mainly responsible for this leadership in the meat market bovine as we will see below. Business Model JBS is the largest animal protein company in the world and the second-largest food company. With a presence on six continents, its core business is the processing and distribution of beef, pork and chicken, in addition to producing several other types of foods, such as processed foods, sausages, and plant-based products, among others. Geographic & Protein Diversification (IR Company) Its portfolio contains several brands recognized in Brazil and around the world. Its 5 main business units are: Seara, JBS Brasil, JBS USA Beef (which includes Australia and Canada), JBS USA Pork and Pilgrim’s Pride Corporation (PPC). JBS's business model is very robust due to its business diversification, geographic diversification, business scale, as well as a long-term relationship with farmers and distributors in Brazil and the USA. All these competitive advantages corroborate my purchase recommendation, and now we will carry out a financial analysis of the company and its competitors. JBS Fundamentals Now, I'm going to do a financial analysis of JBS and its competitors around the world, such as Tyson Foods (NYSE:TSN), BRF (NYSE:BRFS), Pilgrim's Pride Corporation (PPC), and Maple Leaf Foods (OTCPK:OTCPK:MLFNF).   Ticker (JBSAY) (TSN) (BRFS) (PPC) (MLFNF)   Name JBS Tyson Foods BRF Pilgrim's Pride Maple Leaf Foods   Market Cap $12.3B $20B $6.3B $8.7B $2B   Revenue $73B $52.9B $10.7B $17.5B $3.5B   Revenue Growth 5 Year [CAGR] 14.9% 5.7% 12.1% 9.7% 6.8%   EBITDA Margin 5.1% 4.3% 7.5% 7.1% 8.2%   Net Income Margin 0.5% -1.1% -0.9% 2.8% -0.3%   ROE 5.2% -3.2% -1.9% 15.3% -1%   Dividend Yield 3.6% 3.3% - - 3.2%   Net Debt / EBITDA 4.5x 2.9x 2.8x 1.9x 4.4x   Click to enlarge We can see good trends in the numbers, as JBS has the highest revenue and the highest revenue growth in the last 5 years. Additionally, the company has decent Ebitda margin, ROE and dividend yield numbers. This balance of good indicators, together with the diversification that the company has, corroborates my recommendation to buy the shares. But what about the valuation? Is it attractive? Valuation Is Very Attractive As JBS and its peers are exporting companies, exchange rate variations can bring volatility to operating profits, which is why we will evaluate the company through a comparative analysis of the EV/EBITDA multiple.   EV/EBITDA (Koyfin) As we can see, JBS has the lowest projected EV/EBITDA multiple, and if we add up all the multiples and divide by 5, we reach a peer average of 7x. JBS trades with an EV/EBITDA multiple of 5.9x, a significant upside potential of 18.6% for JBS shares, corroborating my purchase recommendation. Now, let's look at the Quant Ranking and Factor Grades tools. JBS According To Quant Rating And Factor Grades According to the grade factor, JBS has excellent growth, profitability and momentum scores. Quant Rating And Factor Grades (Seeking Alpha) However, due to the average valuation score, the recommendation is to hold the shares, which I do not particularly agree with, as was shown in the previous chapter. Additionally, there are no grades for reviews. As I will show in the next chapter, JBS's results are improving and would be worthy of a good earnings revision grade. Latest Earning Results JBS reported good results in 1Q24, the company's revenue reached $17.9 billion (-7.5% q/q and +7.9% y/y). But what caught our attention was the margin gain in a large part of the company's operations. EBITDA (IR Company) Geographic diversification is a great ally of JBS's results, making them more stable. Furthermore, another highlight is the downward trajectory in JBS's leverage due to the company's better cash generation. Net Debt/EBITDA (Koyfin) The good results corroborate my recommendation to buy JBS shares, as well as the good growth prospects for the meat sector globally. But we also need to know the risks of the thesis before making the investment. Potential Threats To The Bullish Thesis Business is cyclical, so the supply of cattle and pigs in the geographies where the company operates, such as Brazil and the United States, must be monitored. However, I would say that the main risk to the thesis is not this. The main risk to JBS's thesis is corporate governance. JBS is controlled by the founders, the J&F Group, of the Batista family, who, after becoming involved in corruption cases, affirmed in 2017 an agreement with Brazilian authorities for retraction. It is worth noting that the Workers' Party, which faced several cases of corruption during Dilma Rousseff's administration, is once again commanding the presidency with Lula. The risks to the thesis are diverse and investors should be careful before making the investment. The Bottom Line JBS is a global company, and its geographic diversification mitigates several operational risks, such as the supply of cattle and the economy of each geography where the company has operations. Additionally, the company has good financial indicators compared to its competitors, however, the valuation does not show this, as the company has an appreciation potential of 18.6%. Based on this analysis, I recommend buying JBS shares. Investors should pay attention to the global leadership that the company has in its market, relationships with suppliers and discounted valuation.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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