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Investing in Chicken Mexico's Number One Chicken Producer
In other words, despite the fact that Mexico is still much poorer than the U.S., it also has a lot further to grow -- especially when it comes to chicken production and consumption. And despite some bumps along the way, it is growing. The Department of Agricultural and Applied Economics at Texas Tech University published a paper on Mexican chicken patterns. It is called 2025 Vision for Mexican Chicken Consumption. Based on extensive research, the school found that chicken consumption among the highest decile of Mexican consumers (i.e., the richest) increased more than 880% between 1984-2002. Meanwhile, for the fourth decile (the middle class), consumption increased 480%. And the tenth decile (the poorest) saw a 250% increase. The two main reasons for the growth are the implementation of the North American Free Trade Agreement (which took effect in 1994 and limited the number of cheap U.S. hindquarters that could be imported into Mexico) and Mexico's improving economy. ****************************** The Full-on Oil War of 2007 Bloody New "Backlash" Set to Rocket Oil Past $150...and Send Gas Soaring to Over $6 per Gallon. ****************************** The International Monetary Fund recently reported that Mexico's economy should grow 4.4% this year, thanks to a strong financial sector and a robust commodities market. And with the Mexican middle class larger than ever (40% of all Mexican families are middle class, compared with just 30% a few years ago), the market for chicken is at an all-time high. It will only get bigger from here. According to the Texas Tech study, Mexico's population is expected to grow over 1% a year between now and 2015. Per capita chicken consumption is projected to increase by at least 64% in the next 20 years. And if the country maintains only its average annual growth rate of 7% a year, it will become a net exporter of chicken in the next few years. Add it all up and Mexico's largest chicken producer, Industrias Bachoco SA (IBA:NYSE), is set to grow quite considerably in the years to come. No. 1 in Mexico The famous Bours family -- which owns about 80% of the company's stock -- founded Industrias Bachoco in 1952. It started out as a small table egg operation in the Mexican state of Sonora. By 1971, the Bours opened their first poultry operation in Culiacan, Sin. And the rest is history. Thanks to several key acquisitions over the last several years and significant organic growth, IBA is currently Mexico's largest chicken producer -- bar none. IBA is to Mexico as Tyson Foods is to the United States. And as longtime Small-Cap Strategy Report readers know, I love owning industry leaders. They tend to have better pricing power, brand recognition and visibility in the investment community. IBA is certainly a visible company in Mexico. And it's only a matter of time before America starts to pay attention. Bachoco -- as it is referred to in Mexico -- has 700 production and distribution facilities in that country. In FY 2005, the company raked in $1.36 billion in sales -- of which 80.1% stemmed from chicken sales. The rest came from table eggs, feed and swine. To put that in perspective, the entire Mexican chicken market is worth only approximately $3.5 billion. So IBA has a dominating 32% share of the entire market. By comparison, Tyson has a 26% share of the U.S. chicken market. And unlike Tyson, Bachoco is both cheap and financially strong. Trading for Less Than Book Value IBA currently trades for less than one times sales and book value. While it's not uncommon for chicken producers to trade for less than one times sales, it is rare to find a large company that trades for less than book value. And on top of that, IBA has virtually no long-term debt and tons of cash. Take a look at this table comparing IBA with its major peers:
What I really like about IBA (in addition to the fact that it is cheap) is its cash position. If you factor out the mere $3 million in long-term debt, the company is sitting on $313 million in net cash. That's a lot of money IBA can use to expand operations, endure some lean years or reward shareholders. ****************************** The World's Best Energy Investment There's a little-known company that's working on an energy breakthrough. It's cheaper, more plentiful and safer than gasoline. Yet this new "designer fuel" packs enough punch to gas up every single truck, car and diesel engine train in America...for the next 811 years. Get in now on this incredible opportunity... ****************************** One way I think IBA could reward shareholders is by maintaining its attractive balance sheet and letting someone like Tyson or ConAgra buy it outright. If that happened, chances are IBA's shareholders would be rewarded with a nice premium. For instance, Pilgrim's Pride offered to buy Gold Kist for $20 per share this past August. The reason that is significant is because Gold Kist stock was trading for only $12.93 a pop at the time. The day the bid was placed, shares jumped 47%. (Luckily, my buddy Chris Mayer had the stock in his Capital & Crisis portfolio. So his readers made a fortune in almost no time.) And I do expect this is a realistic scenario for IBA shareholders, as well. I read Tyson's latest annual report as part of my due diligence on the chicken sector. I was interested to see that Tyson considers Mexico one of the key areas to explore and expand in in the future. As management says, "We are looking for opportunities to expand the company's chicken business in Mexico via joint ventures or acquisitions. Tyson is also examining the possibility of establishing a presence in Mexico with beef and pork." As I have already made clear, IBA has a massive network of chicken facilities in Mexico. And it also has some exposure to beef and pork. According to IBA's third-quarter earnings release, 81.75% of its total sales comes from chicken, 8% comes from table eggs and 3.6% comes from swine and other meats. It seems IBA is a perfect takeover target for Tyson. Four Risks to Consider Of course, no stock is without risks. And IBA is no exception. There are four main risks to its business... The first is NAFTA. Right now, there is a limit to the amount of cheap chicken hindquarters that can be imported from the United States. That agreement ends in 2008. So there could be a dramatic increase in competition from companies like Tyson, Pilgrim's Pride, Gold Kist, etc., when the agreement comes to a close. The second risk is Bird Flu. Should another panic wave strike (and it will), chicken stocks will fall -- just like we saw this past year. The third risk for IBA shareholders is that the Bours family does something stupid with their massive controlling interest in IBA. With about an 80% stake, they hold all the power. (Of course, the other side of that argument is that their interests are aligned with shareholders.' If they make solid business decisions, they make money right along with their minority owners.) The final risk to IBA's stock is liquidity -- specifically, a lack of it. IBA's average daily trading volume is just over 15,000 shares a day. That is VERY thin. If a few hundred people all tried to buy or sell at once, they could easily move the price of the stock. For this reason, I am not recommending IBA as a Small-Cap Strategy Report holding. But I have been following this company for several months now. And I wanted to bring it to your attention. Should IBA plunge on Bird Flu fears or come down with the overall market, this is a stock you might consider buying for your own portfolio. Over time, it should grow along with Mexico's economy. And based on all the projections I can get my hands on, Mexico should grow quite a bit in the next decade. Don't be surprised if IBA makes investors double- or triple-digit profits in the coming years. But you'll need to be patient. Buy on the dips. Regards, James P.S.: Here's the only investment secret (and the only two stocks) you may ever need to know to become truly wealthy. This report is so exclusive and powerful, only a few dozen people can get in at this time. You see, these stocks are very small...far too illiquid for thousands of people to jump in at once. But I am so confident the secret could help you outpace the markets 19-fold in the next six months, I'm prepared to offer you a deal so incredible, you may never have to worry about your financial future again. Read on for details... |
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James Boric is the editor-in-chief of Small-Cap Strategy Report and he constantly scours the market for fundamentally sound small-cap companies with tons of growth potential... <click here for full bio> |
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