Bunge Global SA(NYSE:BG) is an agribusiness company is operates in an industry plagued with price fluctuations and demand fluctuations due to the seasonality nature of the agricultural sector. Despite these characteristic challenges, the stock is up about 80% over the last five years. I believe this is because of its strong track record of delivering profitability and strong cash flows. For example, the company has been improving its revenues and profits since 2020, recording total revenue of $67.23 billion in 2022 and $61.26 billion TTM, and a net income of $1.61 billion in 2022 and $1.96 billion TTM. It has also increased its dividend by an average of 9.4% over the last 10 years. It also has a strong balance sheet with a net debt to EBITDA ratio of 1.06x and ample liquidity, with $2.3 billion of cash.
The company has a diversified and resilient business model as exhibited by its core competencies that benefit from its exposure to different geographies, commodities, and end markets. Besides diversity, the company uses futures and options to hedge against price volatility in the market something I believe has been key to its success this far. Given that the 2024 outlook is mixed as will be discussed later, I believe BG is well positioned to capitalize on the opportunities as well as overcome the challenges through its diversification and hedging strategy.
BG is undervalued based on relative valuation metrics, and technical analysis indicates that the stock is on a bullish trajectory. Given the company’s commitment to creating value for shareholders and returning capital to them, I believe BG is an attractive investment at the moment and rate it a buy.
BG Core Competencies
According to my assessment, BG possesses four major competencies. Let’s take a look at them.
Global scale and diversification: BG operates in more than 40 countries and has a presence across the entire agricultural value chain, from origination to processing to distribution. I believe this gives it a competitive edge in accessing and serving customers around the world. Further, its global footprint helps it to capitalize on the strengths of different economies as well as capitalizing on booming economies to hedge the effects of poorly performing economies in its operations. Furthermore, because of its diverse commodities, it can easily overcome seasonality in revenue generation by capitalizing on crops that are in season or even offering on-season crops in some regions as off-season commodities where they are off-season and command higher market prices. For example, it could source soybeans from Brazil during the northern hemisphere winter, when the supply was from the US and Canada was low and prices were high. Below is its revenue breakdown from its diverse geographical footprint and product offering.
Innovation and customer focus: The company partners with its customers to provide the support and expertise they need to create high-quality products for today’s consumers. It also invests in research and development, digital transformation, and sustainable solutions to meet the changing needs and preferences of the market. To support this assertion, I will give an example of BungeMaxx, one of its innovative products. It meets the changing consumer needs by offering plant-based, non-GMO, and allergen-free solutions for various applications, such as bakery, confectionery, dairy, infant nutrition, and more. This product is an example of how BG leverages its expertise in oils and fats to create innovative and value-added products for its customers.
Operational excellence and efficiency: The company strives to optimize its performance and profitability by implementing a global operating model. Among other initiatives being implemented by BG to achieve operational excellence and efficiency is through joint ventures. For example, one of the most recent acquisitions of BG is its merger with Viterra Limited which is expected to close mid this year. I expect the merger to improve the efficiency and profitability of the combined company by leveraging their complementary assets, capabilities, and talent in the long run.
Sustainability and social responsibility: BG is committed to minimizing its environmental footprint and contributing to innovative solutions that cut carbon across its value chains. It also adheres to high standards of safety, ethics, and governance, and supports the well-being of its employees, communities, and stakeholders.
Based on these four key competencies, I believe the company is committed to global growth that is both sustainable and responsible. Its diversity and global presence enable it to access a large market base while also meeting diverse consumer needs through its diverse product range, resulting in higher customer satisfaction. Furthermore, in my opinion, its operational efficiency will go a long way toward improving its profitability. Further, the company’s commitment to meeting diverse and changing customer needs is exemplified by its innovation with a customer-centric culture. In a nutshell, these four competencies will serve as the foundation for the company’s long-term growth.
2024 Agricultural Commodity Outlook: What Are The Implications?
The agricultural commodity market outlook for 2024 is mixed. With some projected price decline and increasing demand. The company’s financial performance is largely influenced by the fluctuations in agricultural commodity prices, as well as the demand and supply dynamics in its key markets. Based on the latest available data, BG reported a net income of $1.96 billion for the trailing twelve months [TTM] ending September 30, 2023, up from $1.61 billion in 2022. Its revenue for the TTM was $61.26 billion, down from $67.23 billion in 2022. This strong performance in an adverse 2023 tough 2023 characterized by low demand and geopolitical wars, in my view, speaks volumes about this company’s resilient business model.
With this in mind, I believe the 2024 outlook has the following implications for BG’s financials.
- Lower prices for grains and oilseeds may reduce the company’s revenue and margins, as well as increase the competition and price pressure from other players in the industry.
- On the other hand, lower prices may also stimulate demand and consumption, especially in emerging markets, where BG has a strong presence and growth potential.
- The company may benefit from its diversified portfolio and its ability to leverage its global network and scale to optimize its sourcing, logistics, and processing operations.
- The company may capitalize on the opportunities arising from the temporary price spikes in sugar, coffee, and cocoa, as well as the increasing demand for biofuels and renewable energy.
While these are the possibilities from this mixed outlook, I am confident in the company’s resilient and diverse business model which has demonstrated its ability to withstand harsh macroeconomic environments. As a result, expect BG to register strong financial performance in 2024.
BG Deliver To Shareholders
The management’s dedication to delivering value to shareholders through capital returns and value creation is one of BG’s appealing qualities. Let’s walk through some of the highlights of this attribute.
- ROIC and ROE: The company has a ROIC of 12.56 and a ROE of 20.15. These values indicate that BG is generating a positive return on both its invested capital and its shareholder equity.
- Total return: The company has an impressive total return of 109.86 over the last five, outperforming the S&P 500 by a margin of about 24.68%. In my view, this impressive total return not only speaks volumes about the company’s profitability and growth but also its competitive advantage because it can attract and retain more loyal investors.
- Returning capital to shareholders: BG has consistently returned capital to shareholders through dividend payments and share repurchases. It has been paying quarterly dividends since 2001 and has increased its annual dividend per share from $1.28 in 2014 to $2.58 in 2023, growing its annual dividend by more than two times over the last 10 years.
Further, the company has been repurchasing shares as a way of returning capital to shareholders. The company announced a share repurchase program in June of last year, whereby it plans to buy back up to $2,000 million worth of stock. The program’s objective is to improve accretion to adjusted EPS.
In conclusion, BG management is committed to creating value for its shareholders as well as returning capital to them. I believe with this commitment, BG is a good investment for investors.
Based on relative valuation metrics, BG appears undervalued and therefore this makes it an attractive investment thesis. It has a low price-to-earnings (P/E) ratio of 7.66, which is lower than the sector median of 21.01. This means that the company’s earnings are not fully reflected in its stock price, and it could be trading at a discount. Additionally, it has a low price-to-sales (P/S) ratio of 0.24, which is lower than the sector median of 1.12. This means that the company’s revenue is not fully valued by the market, and it could have more growth potential. This phenomenon of its valuation metrics being below the sector median is evident in all metrics as shown below.
Based on these relative valuation metrics, BG seems to be undervalued and could offer a good investment opportunity for value investors. From a technical point of view, the stock just crossed its 50-day moving average signaling a bullish trend. With an RSI of 40.1, it shows that the stock has a lot of room to grow before it reaches its oversold region of 70. For this reason, I recommend buying this stock at its current valuation.
While I am optimistic about BG’s merger with Viterra because it comes with a lot of synergies ranging from financial, global presence, and efficiency synergies, I also find it a major risk to invest in this stock. The deal is expected to complete by mid this year subject to regulatory approvals. If the deal goes through seamlessly, it will make Bunge the world’s largest oilseed processor as it seeks to capitalize on the rising demand for vegetable oils for biofuels.
However, with the deal subject to regulatory scrutiny, particularly with the Canadian government reviewing it, there is no guarantee that it will materialize. If the deal fails to materialize, it poses a major risk because of the following reasons.
- The merger is anticipated to generate approximately $250 million in annual gross pre-tax operational synergy within three years of completion and be accretive to Bunge’s adjusted EPS in the first full year after closing. If the deal falls through, Bunge would lose the opportunity to realize these benefits and enhance its profitability and growth prospects.
- The deal is also expected to strengthen Bunge’s balance sheet and capital structure, as well as improve its credit profile and ratings. Bunge plans to repurchase $2 billion of its stock to offset the dilution from the merger and increase its return on equity. Without the merger, BG would have less financial flexibility and lower shareholder value.
Therefore, the merger with Viterra is a critical factor for Bunge’s stock performance, and any disruption or delay in the closing of the deal would hurt Bunge’s share price and investor confidence.
In conclusion, given the company’s core competencies, which I believe will drive the company’s long-term success; BG is a good investment opportunity. Furthermore, its business model is very diverse, and it has demonstrated resilience to macroeconomic adversities by delivering strong financial performance even in a difficult 2023. With management committed to returning capital to shareholders and creating value for them, I believe this is sufficient to attract and retain investors. Additionally, because the stock is undervalued based on relative valuation metrics, I believe it is an excellent entry point for potential investors. Investors, however, should be wary of the risks associated with investing in the stock, particularly if the company fails to complete the merger with Viterra.