In last week's issue, we published a bulletin advising members to sell their shares in Cresud SACIF (NDQ: CRESY). Today, contributing editor Gavin Graham explains his reasons for making the call. Gavin is the president of Graham Investment Strategy and a frequent guest on radio and television business shows. Here is his report. Gavin Graham writes:
After my visit to Argentina earlier this year, I reviewed some of the Argentinean stocks that were available in ADR form in New York. I concluded that the most interesting was Cresud, an agricultural company that owns beef, dairy, and corn farms in Argentina as well as a 57.5% position in property company IRSA and a stake in a Brazilian farm company, BrasilAgro.
Since the recommendation in June at $11.94 (figures in U.S. dollars), Cresud has appreciated sharply. The shares are now trading more than 50% higher than at time I wrote about them. This reflects the excellent performance of the company over the last year and a half, as it has recovered from the drought that hit Argentina in 2008-09 and a dispute with the government over export taxes on farm produce that disrupted shipments.
In the fiscal year that ended June 30, Cresud recorded a 172.5% increase in operating income to Ps587 million (US$150 million @ US$1 = Ps3.9). Net earnings were up 48.8% to Ps185 million (US$47 million), partially driven by a 30% increase in agricultural sales to Ps308 million. That helped turn a Ps62 million loss in 2008-09 into a Ps60 million profit.
The inclusion of Cresud's 57.5% stake in IRSA's results saw real estate account for Ps526 million of operating income on sales of Ps1.337 billion, comprised of the rental income from its portfolio of Buenos Aires office buildings, shopping centres, and hotels as well as its property development activities in condominiums and shops.
Cresud's 240,000 hectares of agricultural land in Argentina produced 322,000 tonnes of various grains, 85,000 tonnes higher than the previous growing year, and the price of its cattle rose 95% during the year. That was due in large part to a reduction in beef supply as Argentina's cattle herds fell from 60 million to 50 million during three years of drought, thus allowing Cresud to sell part of its 85,000 cattle herd after the rise in price.
During the year, Cresud sold the Tali Sumaj farm for US$4.8 million and arranged the sale of another farm, the dairy producing La Juanita operation, for US$18 million for a profit of Ps49.4 million (US$12.7 million). These deals closed in the first quarter of fiscal 2011, both at around four times their book value.
In the first quarter of the new fiscal year, sales increased by 42% to Ps469 million (US$120 million) while operating income rose 103% to Ps183.6 million (US$47 million). This improvement was partially due to the sale of the La Juanita farm but also to a 42% increase in grain sales and a 152% increase in the sales of beef cattle.
Ironically, Cresud's net income was 15% lower at Ps51.9 million compared to Ps61.8 million owing to lower income from its IRSA holding, reflecting the timing of property sales. The company also agreed to invest R130 million (US$76 million) to increase its stake in its Brazilian agricultural subsidiary BrasilAgro to 35.8% of the company from 20%. BrasilAgro has planted 65,600 of its 127,000 sowable hectares of land in Brazil for this growing season with soybeans, corn, rice, sorghum, sugar cane, and forestry, making a total of 189,000 planted hectares for Cresud's operations for this year including 100% of BrasilAgro.
After the end of the first quarter, IRSA also bought a further stake in shopping centre operator and developer APSA, taking its holding to 94.9%. Meanwhile, Cresud had bought back 6% of its shares at US$7.18 per ADR in 2009, compared to the present price of US$18+, increasing the net asset value of its shares.
With all this excellent news from the operating subsidiaries, why am I recommending a sale at the moment? Firstly, much of the good news on the agricultural front has already been reflected in the 50%+ increase in the share price over the last few months. A perfect storm of extreme drought in European Russia and the Ukraine combined with very wet conditions in Canada's prairies and too much rain in the U.S. Midwest has seen grain prices spike higher in the last few weeks. While Argentina is benefiting from these trends at present, its own drought a couple of years ago is a reminder that crops are very dependent upon weather.
Secondly, the sudden death of former Argentine President Nestor Kirchner from a heart attack at the age of only 60 (he was the husband of the present incumbent Cristina Kirchner) should remind investors of the uncertainties of Argentinean politics. Informed observers expected Mr. Kirchner to run in the 2011 Presidential election, allowing his Peronist party to sidestep the rule on presidents only serving two four-year terms. Now there are questions as to whether his widow will be able to win re-election herself, given the acceleration of inflation and corruption scandals that have been dogging her presidency.
As I mentioned when discussing Argentina as an investment, foreign investors have not made any money over the last decade in U.S. or Canadian dollar terms due to currency depreciation and bad policies. Cresud was recommended not as a Buy and Hold but rather as an attractive way to play agriculture and property in a market where they were cheap. With the rapid run up in the price, profits should now be taken.
Action now: Sell.
After my visit to Argentina earlier this year, I reviewed some of the Argentinean stocks that were available in ADR form in New York. I concluded that the most interesting was Cresud, an agricultural company that owns beef, dairy, and corn farms in Argentina as well as a 57.5% position in property company IRSA and a stake in a Brazilian farm company, BrasilAgro.
Since the recommendation in June at $11.94 (figures in U.S. dollars), Cresud has appreciated sharply. The shares are now trading more than 50% higher than at time I wrote about them. This reflects the excellent performance of the company over the last year and a half, as it has recovered from the drought that hit Argentina in 2008-09 and a dispute with the government over export taxes on farm produce that disrupted shipments.
In the fiscal year that ended June 30, Cresud recorded a 172.5% increase in operating income to Ps587 million (US$150 million @ US$1 = Ps3.9). Net earnings were up 48.8% to Ps185 million (US$47 million), partially driven by a 30% increase in agricultural sales to Ps308 million. That helped turn a Ps62 million loss in 2008-09 into a Ps60 million profit.
The inclusion of Cresud's 57.5% stake in IRSA's results saw real estate account for Ps526 million of operating income on sales of Ps1.337 billion, comprised of the rental income from its portfolio of Buenos Aires office buildings, shopping centres, and hotels as well as its property development activities in condominiums and shops.
Cresud's 240,000 hectares of agricultural land in Argentina produced 322,000 tonnes of various grains, 85,000 tonnes higher than the previous growing year, and the price of its cattle rose 95% during the year. That was due in large part to a reduction in beef supply as Argentina's cattle herds fell from 60 million to 50 million during three years of drought, thus allowing Cresud to sell part of its 85,000 cattle herd after the rise in price.
During the year, Cresud sold the Tali Sumaj farm for US$4.8 million and arranged the sale of another farm, the dairy producing La Juanita operation, for US$18 million for a profit of Ps49.4 million (US$12.7 million). These deals closed in the first quarter of fiscal 2011, both at around four times their book value.
In the first quarter of the new fiscal year, sales increased by 42% to Ps469 million (US$120 million) while operating income rose 103% to Ps183.6 million (US$47 million). This improvement was partially due to the sale of the La Juanita farm but also to a 42% increase in grain sales and a 152% increase in the sales of beef cattle.
Ironically, Cresud's net income was 15% lower at Ps51.9 million compared to Ps61.8 million owing to lower income from its IRSA holding, reflecting the timing of property sales. The company also agreed to invest R130 million (US$76 million) to increase its stake in its Brazilian agricultural subsidiary BrasilAgro to 35.8% of the company from 20%. BrasilAgro has planted 65,600 of its 127,000 sowable hectares of land in Brazil for this growing season with soybeans, corn, rice, sorghum, sugar cane, and forestry, making a total of 189,000 planted hectares for Cresud's operations for this year including 100% of BrasilAgro.
After the end of the first quarter, IRSA also bought a further stake in shopping centre operator and developer APSA, taking its holding to 94.9%. Meanwhile, Cresud had bought back 6% of its shares at US$7.18 per ADR in 2009, compared to the present price of US$18+, increasing the net asset value of its shares.
With all this excellent news from the operating subsidiaries, why am I recommending a sale at the moment? Firstly, much of the good news on the agricultural front has already been reflected in the 50%+ increase in the share price over the last few months. A perfect storm of extreme drought in European Russia and the Ukraine combined with very wet conditions in Canada's prairies and too much rain in the U.S. Midwest has seen grain prices spike higher in the last few weeks. While Argentina is benefiting from these trends at present, its own drought a couple of years ago is a reminder that crops are very dependent upon weather.
Secondly, the sudden death of former Argentine President Nestor Kirchner from a heart attack at the age of only 60 (he was the husband of the present incumbent Cristina Kirchner) should remind investors of the uncertainties of Argentinean politics. Informed observers expected Mr. Kirchner to run in the 2011 Presidential election, allowing his Peronist party to sidestep the rule on presidents only serving two four-year terms. Now there are questions as to whether his widow will be able to win re-election herself, given the acceleration of inflation and corruption scandals that have been dogging her presidency.
As I mentioned when discussing Argentina as an investment, foreign investors have not made any money over the last decade in U.S. or Canadian dollar terms due to currency depreciation and bad policies. Cresud was recommended not as a Buy and Hold but rather as an attractive way to play agriculture and property in a market where they were cheap. With the rapid run up in the price, profits should now be taken.
Action now: Sell.
