Are food stocks reliable during a recession? more than most
With rates rising but inflation also persisting for now, the holy grail are successful investments in both wealth destruction environments as we are still unsure of the conviction of current monetary policy regimes in Reason to the nature of inflation being cost pushing. Food stocks, and not necessarily consumer staple brands that don’t benefit from the same level of vertical integration, can perform well when they are able to price products in an inflationary environment to at least maintain unit margins. , and when products are sufficiently essential where end markets will be resilient. We have three choices that either benefit from sufficiently crushing growth, or an ability to overstate inflation, or end markets essential enough in a consumer crisis where, given the price, the value provided by their security in an uncertain environment seems underestimated.
The first idea is the most obscure and interesting, it is the Norwegian company Aker BioMarine which trades exclusively on European exchanges, mainly the OSE.
Aker BioMarine is very well positioned for the current environment due to both idiosyncratic and industry factors. The company has specialist trawlers that together catch more than 50% of the world’s krill, a small, delicate crustacean whose oils are used for omega-3 supplements and whose flesh is used in fishmeal for farming. shrimp and salmon. Aquaculture contracts in particular are not yet reflecting the inflationary environment, so we are assured of price growth as contracts have already been rolled over for the next quarter, and aquaculture exposure now represents 50% of company profits. As fishmeal competes with grain meal, the wheat crisis in Ukraine benefits Aker BioMarine. Supplement exposure is more discretionary and more exposed, but due to a few weak years due to a market crash in South Korea due to bad actors lying about the krill oil content of products, comps are very weak and the gradual recovery there even a level of recession would be a gradual improvement.
The other major appeal of Aker BioMarine is that they have hedged their oil exposure, around 20% of OPEX, entirely through 2024 through hedges created in 2020, the worst year for oil in a while. .
Finally, taking a moat approach, Aker BioMarine’s close competitors will take at least four years to build the specialized trawlers used to suck krill out of the ocean. Additionally, krill catches are about half of the annual quota, meaning overfishing is not a risk, and Chinese players won’t be able to expand their operations for years. With approximately 38% staged and normalized EBITDA, the company has a high-margin tangible asset economy with several idiosyncratic factors that go unnoticed given the 10x normalized EV/EBITDA ratio. With secular growth, evidenced by the surplus of krill in the oceans even after fishing, this emerging product deserves a much more growth-oriented multiple.
The only downside, besides the risk to the Consumer Discretionary market, is liquidity, where orders are difficult to fully fill once they exceed $10,000, so we’re giving investors a few more ideas.
The next interesting food idea is Adecoagro. The company recognizes results in 4 segments.
Crops include peanuts, sunflowers and cereals. Dairy is simply the milk and cheese segment. Rice is counted separately. S&E is the production of ethanol from agricultural waste.
The company is a clear beneficiary due to crop exposure to invasion from Ukraine, where effective fertile land for food supply has drastically diminished for the Western bloc. Sunflower oil stands out personally, with its prices in my supermarket having increased 5 times since the beginning of the year. But because Ukraine and Russia are both major grain producers, whether it’s wheat or any wheat substitute, prices will have risen for those long-lasting reasons not associated with regular market cycles.
Rice is a typical discount product, which can be considered inferior, which should be resilient in today’s consumer crimp. Dairy products should also be quite resistant. Finally, as ethanol is needed to raise fuel octane in Brazil, a market that has fully embraced this alternative fuel almost as a primary fuel, this segment is a reopening game, where the mobility recovery is supporting the direction of the segment, as well as the general lack of capacity for refining and supplying oil markets. Trading at 7% FCFY, the company is quite attractive, although some floating rate leverage and commodity cash flow volatility are things that investors should consider as significant risks when trading. position sizing.
Bachoco Industries (IBA)
Another idea that offers value to investors is IBA. It is a Mexican company that mainly produces chicken and sells it in supermarkets under its own brand. In an inflationary environment, they easily outpaced meal price inflation with price increases, increasing absolute margins. Additionally, their markets are expected to be quite resilient, with chicken being a staple protein in Western diets.
However, the particularity of IBA that makes it attractive is that the controlling family wishes to make a public tender offer for all the shares it does not own, in effect seeking to privatize the company. At the time of writing, the bid price is expected to be around 10% above current prices, and with the process having started with the authorities likely many months ago, we could be very close to the finalization of this offer and the 10-day period within which the board must submit a fairness opinion. A 10% return in a short period of time is enviable in today’s market where capital appreciation is difficult.
It is not yet known whether the board of directors recommends that shareholders accept the offer, but in either case, new investors could benefit. Long-time investors would complain about the offer price being lower than book value. As the business is rather attractive, and with possible longer-term value creation, it is reasonable to oppose it. Therefore, a rejection recommendation, if it prevents the takeover bid from succeeding, could also be a good thing for new investors as well as old ones.
There is also the risk that the approval of the purchase offer will take so long because the controlling family has done something recently and could submit a lower offer than expected. If this were recommended by the board and the tender offer was accepted, that would be more unfortunate, but ultimately the downside risk is very limited, with a deep discount offer being very little likely to be accepted. With privileged fundamentals, the company appears interesting.
Food stocks have been able to outpace inflation with price increases, and consumer crimping shouldn’t be a big deal for essentials like food that are likely to gain wallet share, albeit in a wallet of reduced consumption. With the ideas above benefiting from both an overweight category and specific sources of margin of safety, this proves that there are still some prime places investors can hide in today’s tough markets. While even these carry their own risks, unless you want to miss the handful of major bull days in the market by staying away, not knowing when it’s really safe to re-enter, these food stocks seem to be among the few good places to park cash.