The world’s biggest producer of animal protein, Brazil-based JBS SA (JBSAY, Financial), reported a 14% revenue decline to 37.6 billion Brazilian reals ($11.5 billion) in the first quarter and 422 million reals in profits compared to 2.74 billion reals in losses in the same period last year.
Operational expenses for the $7.2 billion company declined by 12%, and finance expenses were about 6 billion reals less in the recent quarter.
In review, JBS recorded 5.82 billion reals in expenses in relation to derivatives results in the first quarter of fiscal 2016 resulting in losses for that period (1).
“We started 2017 performing well in our international business units, boosted by strong demand in the markets where we operate. Our operations in South America, on the other hand, continued to face a challenging scenario, mainly due to the strong appreciation of the real against the U.S. dollar.
"Our global production platform, product diversification, continuous investments in innovation and constant focus on cost control and efficiency, allowed us to mitigate the effects from a challenging scenario in South America with good results from our international operations.” – Wesley Batista, CEO
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Total return
Holding JBS ADR as an investment has been a failure and has not returned any positive returns to its shareholders in the past five years having had 1.24% total losses compared to 15% total gains by the Standard & Poor's 500 index (Morningstar data).
Brought by recent political turmoil, JBSÂ ADR has provided 27% total losses so far this year compared to the S&P 500’s 6.12% total gains.
Valuations
JBS is undervalued compared to industry figures. The company had a trailing price-earnings (P/E) ratio of 7.3 times vs. the industry figure of 22.3 times, a price-book (P/B) ratio of 1.07 times vs. 3.3 times and a price-sales (P/S) ratio of 0.16 times vs. 1.87 times (Reuters data).
JBS also had a trailing dividend yield of 0.35% with a 252% payout ratio.
Average 2017 sales and earnings per share indicated forward multiples of 0.13 times and 6.2 times.
JBA SA
JBS SA is headquartered in Brazil and is a food company with more than 60 years of tradition and a global leader in the processing of animal protein. JBS’s operational structure includes beef, pork, lamb, poultry and hides/leather processing facilities in addition to feedlots.
Besides its Food business, JBS also conducts business concerning hygiene and personal care products, collagen, can making, sausage casings, biodiesel, carrier, waste management and recycling.
In 2016, 68% of JBS revenue came from the U.S., followed by 27% from South America and other countries. Also, there are no revenues arising out of transactions with any single customer that represents 5% or more of JBS’s total revenues.
JBS has divided its business in four units: Beef, Chicken, Pork and Others.
Beef
The Beef segment operates slaughter facilities, cold storage and meat processing operations for the production of beef preservatives, fat, feed and derivate products having locations in Brazil, the U.S., Canada, Australia, Argentina, Uruguay and Paraguay.
In the first quarter sales in the Beef segments fell by 14% to 21.1 billion reals – 56% and largest composition of JBS sales – and delivered an operating margin of 0.4% vs. -2.7% (losses) in the previous year period.
Chicken
The Chicken segment consists of the production and sale of fresh products, chilled as a whole or in pieces, whose operations are located in the U.S., Mexico, the U.K. and Brazil, and sold to restaurant chains, food processors, distributors, supermarkets, wholesale and other retail distributors and also exported to countries in Europe, Asia and other international markets.
In the first quarter sales in the Chicken segment fell by 17.9% to 9.4 billion reals (25% of total sales) and delivered an operating margin of 5.2% vs. 8.3% in first-quarter 2016.
Pork
The Pork segment operations consist of slaughter facilities, processing, cold storage of pork meat, deliveries of fresh meat and the manufacturing of products and subproducts derived from pork meat. Production facilities are in Brazil and the U.S., with sales to the U.S. domestic market as well as foreign markets. The products also include case ready fresh meat.
In the first quarter sales in the Pork segment fell by 7.7% to 4.8 billion reals (13% of total sales) and an operating margin of 9.7% vs. 5.5% in first-quarter 2016.
Others
In the first quarter sales from Others fell by 15.2% to 2.35 billion reals and operating margin of 2% vs. 14.5% in the same period last year.
Sales and profit averages
Overall, JBS had a three-year sales growth average of 22.4%, a profit decline average of 26% and a profit margin average of 1.6% (Morningstar data).
Business unit discussion (some)
JBS has six business units: JBS Mercosul, Seara, JBS Europe, JBS USA Beef, JBS USA Chicken (Pilgrim’s Pride) and JBS USA Pork (2).
In particular, JBS Mercosul and Seara delivered the worst sales growth while accompanied by massive decline in profitability in a year-on-year comparison in the recent quarter.
JBS Mercosul is responsible for beef and hides/leather processing and related businesses  – biodiesel, collagen, hygiene and personal care products and others in Brazil – while Seara also operates exclusively in Brazil and does business in poultry and pork processing and production of prepared products.
The JBS Mercosul and Seara business units have consistently generated more than a quarter of total JBS sales in recent years including the recent quarter. Revenue has declined moderately including 4.7% and 11.1% reductions in the recent quarter.
More importantly, both business units have markedly lost profitability including in the recent quarter.
JBS Mercosul had an EBITDA margin of 1% in the first quarter vs. 11% in first-quarter 2016 while Seara had a 5% margin vs. 14% in the year-earlier period.
According to JBS, most sales and profitability decline was caused by the appreciation Brazil real (local currency) against the dollar.
Cash, debt and book value
As of March, JBS had 10.7 billion reals in cash and cash equivalents and 58.6 billion reals in loans and financing with ratio to total equity (or leverage ratio) of 2.3 times compared to 2.6 times the same period last year. As observed, overall borrowings fell by 5.5 billion reals in the recent period leading to a somewhat less-leveraged balance sheet.
Of JBS’s 104.2 billion reals assets 26%Â were goodwill and intangibles having had a book value of 25.5 billion reals compared to 25.1 billion reals the year earlier.
In the first quarter JBS’s operational cash outflow was 285.4 million reals compared to outflows of 1.1 billion reals the same period last year. Capital expenditures including purchase of intangible assets were 794 million reals leaving JBS with 1.1 billion reals in free cash outflow compared to 1.94 billion outflows last year.
The company has yet to hand out dividends or allocated cash for share repurchases in the recent quarter. On average, JBS provided 1.14 billion reals more than its free cash flow in dividends and share repurchases in fiscal years 2015 and 2016.
In the recent quarter, JBS’s majority-owned subsidiary, Colorado-based Pilgrim’s Pride, finalized an acquisition of Minnesota-based chicken producer GNPÂ for 1.1 billion reals or $357 million at the time of the transaction.
In addition, JBS also took in 3.5 billion reals in borrowings net any repayments made in the quarter.
Conclusion
JBS demonstrated vulnerability despite being a significant player in the global food industry. The company delivered weak operational results in its recent quarter secondary to foreign currency fluctuations among other possible contributing factors.
Meanwhile, the company was able to carry a leveraged balance sheet accompanied by several blue sky elements, such as goodwill and intangibles, which made up a quarter of its assets in the recent period. JBS also seemed to be overly generous to its shareholders despite having lumpy free cash flow performance in recent years.
As long as the Brazilian real maintains its stability in the currency market, JBS may still be able to maintain its profitability. Otherwise, expect weaker operational profitability brought by the ongoing political turmoil in the country.
Nonetheless, brought by the recent stock market decline witnessed in Brazil, JBS’s market capitalization of 23.4 billion reals (at the time of writing) made it trade less than its book value of 25.5 billion reals.
In summary, prospecting investors should want more discount to book value before going long JBS.
JBS is currently undergoing several issues, including breach of fiduciary duties among others. See updated list here:
JBS is a pass, for now.
Notes
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Disclosure: I own shares of JBS ADR.
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