Bunge Stock: Never Sell A Great Company (NYSE:BG)

The following segment was excerpted from this fund letter.

BUNGE LTD

Bunge (pronounced BUN-GEE) Ltd (NYSE:BG) is one of the biggest agribusinesses and food companies in the world. There are four worldwide companies that dominate the sector, the others being Archer-Daniels-Midland Cargill, and Dreyfuss. One of our favorite ways to screen for new ideas is following insider buying. When I saw the Form 4 filed by new Bunge CEO Greg Heckman, his purchase of $9 million of BG stock intrigued me. My initial thought was the company gave him the stock as a signing bonus. I contacted BG Investor Relations and asked whether it was a signing bonus or did Heckman actually write a check for $9 million. IR assured me it was his own hard-earned money that he invested in the company he was about to run.

Heckman was a long time executive at Conagra Foods who obviously sensed opportunity at BG. One of his first moves as CEO was to move the company’s HQ from New York to St. Louis, right in the middle of America’s breadbasket. BG had been plagued for years with poor decisions by underperforming management. Heckman’s decision to move to St. Louis was indicative of a no-nonsense style and he would commence cutting expenses and selling non-core assets.

BG’s operations stretch from farmer to consumer. The company is a leading producer of oilseeds, vegetable oils and protein meals. They are a global grain processor, seller 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 core operations consist of Agribusiness, Edible Oil products, Milling products, and Fertilizer segments.

The Agribusiness segment is an integrated global business involved in the purchase, storage, transportation, processing and sale of ag commodities. The ag operations 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-based products. These operations are located in North and South America.

The Fertilizer segment is involved in producing, blending and distributing fertilizer products for the ag industry in South America, with operations in Argentina, Uruguay and Paraguay, and port facilities in Argentina and Brazil.

We first purchased BG shares in June 2020 for $44 per share. At the time the company’s stock was trading at 10 times earnings, the market cap was $5.8 billion and the stock had a 5% dividend yield. Today the stock trades at $124 per share, has a market cap of $16 billion and the P.E. ratio has fallen to 9 as earnings per share have grown to $13 per share versus $4.50 when Heckman took over.

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

Earnings have been growing at over 50% per year since Heckman became CEO.

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

When the price you pay has a margin of safety built into it, the chances of getting hurt are minimized. A rule of investing that I believe in is “never sell a great company.” Greg Heckman may very well make Bunge a great company, which means we may own it for a very long time.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.