Description

Industrias Bachoco is the $1 Billion sales leading poultry producer in Mexico, where chicken is the number one meat. IBA is a NYSE-listed ADR that is as cheap as ever. Bachoco is the giant in an ultra-fragmented industry.

Summary financials (in US $) and ratios as of their most recent earnings release 10/24/02 (not carried on Yahoo news):

Market Cap $426 million
Total Cash $186 million
Total Debt $ 24 million
Enterprise Value $264 million

9 mos Net Income $104 million
9 mos OCF $127 million
9 mos Depreciation $ 23 million

* FCF roughly approximates Net income, and 2002 NI will be about $130-$140 million.
* The company has been pouring its cash flow into debt paydown after its 1999 acquisition of the industry #4 (which smartly provided both horizontal and vertical integration benefits), and is now nearly debt-free.
* The payout is around 25% of net income - so the dividend yield will be in the upper single digits.

Put in perspective, net income trends:
1998: 92.9
1999: 85.8
2000: 126.8
2001: 117.6
2002: roughly 130-140

* Nominal PE (Market Cap/NI) is 3.2
* EV/2001 EBITDA (will be higher this year) is 264/164 = 1.6
* Adj for net cash and related net interest, adj P/E is 264/125 = 2.1

Shareholders' Equity is $871 million, nearly all of which is tangible.
So P/B is ~ .50

Over last 5 yrs, ROE has been between 12 and 17% despite growing cash drag.
Return on Assets has been ranging 10-15%.
IBA's net profit margins are in the low double digits.

Comparatively, TSN and CHX, both of which have a validating presence in the Mexican market but rank behind Bachoco, carry relative valuations 3-5X higher than IBA despite profit margins less than 2% and poor ROE's. Labor and costs are one major advantage at IBA, which continues to improve its operating margin - now 11.96%.

Risks:
1) A recent Hurricane damaged production at a small portion of IBA's farms. This is a minor, temporary issue, but appeared to hurt the stock.
2) The company is dealing with reduced protection by tariffs, which were cut in half on Jan 1 2002 and will be phased out completely in 2003. 2002 was supposed to be difficult because of this -helping to depress the share price - but the company has been faring much better than anyone expected. Pilgrim's Pride was supposed to be a big threat here, but they keep stumbling over themselves and have a weak balance sheet. This issue cuts the other way in a couple years ways when IBA gets to access feed at cheaper prices thanks to NAFTA. IBA may also be able to leverage its low costs into an export business into the US, per the CEO.
3) There is the potential that the company will lose a favored tax status, though it is unclear that this would disadvantage it significantly in relation to competitors facing similar issues. Apparently the tax would be a VAT, which would increase the prices consumers pay. This has been hanging over the company for some time, also depressing the share price.

Summary: 2X free cash flow; leading market position; large scale; tremendous financial strength with no net debt; big dividend while you wait; a statistical anomaly of a valuation

Catalysts:

Catalyst

Resolution of tax issue, resolution of hurricane fear, and continued good cash production through tariff relief are potential catalysts. Mainly, security just needs some serious consideration by a few smart investors (most of whom won't give a Mexican chicken company the time of day). At this 2X free cash flow valuation, the share price should track cash accumulation - over $2/year - no matter whether multiple expansion occurs or not.