Bunge Stock: Never Sell a Big Company (NYSE: BG)

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The following segment is excerpted from this fund letter.


Bunge (pronounced BUN-GEE) Ltd (NYSE: BG) is one of the largest food companies in the world. There are four global corporations that dominate the sector, the others being Archer-Daniels-Midland Cargill and Dreyfuss. One of our favorite ways to filter out new ideas is to track insider buying. When I saw the Form 4 filed by new Bunge CEO Greg Heckman, his $9 million purchase of BG stock intrigued me. My first thought was that the company had given him the shares as a signing bonus. I contacted BG Investor Relations and asked if it was a signing bonus or if Heckman had in fact written a check for $9 million. IR assured me that it was his own hard-earned money that he invested in the business he was about to run.

Heckman was a longtime executive at Conagra Foods who clearly sensed an opportunity at BG. One of his first decisions as CEO was to move the company’s headquarters from New York to St. Louis, right in the middle of America’s breadbasket. BG had been plagued for years by poor decisions made by underperforming management. Heckman’s decision to move to St. Louis was indicative of a pragmatic style, and he would begin cutting expenses and selling non-essential assets.

BG’s activities extend from the farmer to the consumer. The company is a leading producer of oilseeds, vegetable oils and protein meals. It is a global grain processor, marketer of packaged vegetable oils, producer of wheat flour, baking mixes and dry-milled corn products. BG also produces sugar and ethanol in Brazil. The Company’s main businesses include Agribusiness, Edible Petroleum Products, Milling Products and Fertilizers segments.

The Agribusiness segment is an integrated global business involved in the purchase, storage, transportation, processing and sale of agricultural products. Agricultural activities are located in North and South America, Europe and Asia-Pacific.

The Edible Oil Products segment sells vegetable oils and fats, including cooking oils, shortenings, margarines, mayonnaise and specialty ingredients.

The Milling Products segment includes businesses that sell wheat flours, bakery mixes and corn products. These operations are located in North and South America.

The Fertilizer segment is involved in the production, blending and distribution of fertilizer products for the agricultural industry in South America, with operations in Argentina, Uruguay and Paraguay, and port facilities in Argentina and Brazil.

We first bought BG shares in June 2020 for $44 per share. At the time the company’s shares were trading at 10 times earnings, the market capitalization was $5.8 billion and the shares had a dividend yield of 5%. Today, the stock trades at $124 per share, has a market cap of $16 billion, and the PE ratio has fallen to 9, with earnings per share hitting $13 per share from $4.50 when Heckman took over.

CEO Heckman has done a masterful job of turning the company around. While EVERYONE is clamoring to buy tech stocks based on a multiple of earnings, our contrarian bias draws us to companies with strong balance sheets and steadily growing earnings. BG has $4 billion in net debt, a debt-to-equity ratio of just 1.6, and a current dividend yield of 1.8%.

Revenue has grown more than 50% per year since Heckman became CEO.

The war in Ukraine will have a dramatic effect on the food supply. World wheat and maize production will be severely affected by the war, and since BG’s operations are heavily oriented to the Americas, BG will benefit from shortages and high prices. When investing, you are often surprised by an unknown event, and we have had them in our favor and against us.

When the price you pay includes a margin of safety, the risk of injury is minimized. One investment rule I believe in is “never sell a big company”. Greg Heckman could very well make Bunge a big company, which means we could own it for a very long time.

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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