Brazil’s High-Flying Food Producer

05/29/2008 12:00 am EST

Focus: GLOBAL

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo’s Insiders Plus, finds a large Brazilian food producer that is showing strong growth globally—and still looks cheap.

Sadia S.A. (NYSE: SDA) raises and processes poultry and pork in Brazil and abroad, and sells a wide range of other food products. Its biggest business is frozen and refrigerated meat products of all types.

The company’s sales for 2007 were a little over $5 billion, so it still [has] plenty of room to grow. Last year about 54% of Sadia’s business was domestic, and 46% abroad. Brazil is the fifth largest country in the world, and its standard of living is rising very rapidly, so there’s plenty of opportunity at home, as well as internationally. It’s like the China story, only much, much cheaper. In its recent conference call, [management] forecast sales growth for 2008 in the 12% to 14% range.

That kind of sales growth could be good for [earnings per share] growth of 50% to 70%. In any case, earnings growth should be good enough to justify purchase at the current price. At [recent prices], we were getting the stock for [a little more than] ten times annualized first-quarter earnings.

By the way, our recession should not affect the company much. There’s plenty of internal growth in Brazil, and almost none of Sadia’s sales are to the US. It exports mostly to Russia and the Middle East. The biggest risk factor is probably the cost of feed grain for the company’s livestock, but much of the company’s sales are value-added products with higher profit margins—and all its competitors will face the same cost pressures.

The stock has had a nice move in the last two months, but, as the P/E shows, it’s still dirt cheap. The “on-balance volume” has really cranked up lately, meaning larger investors are starting to find it. (On-balance volume tracks a stock’s momentum by providing a running total of volume and showing if the volume is positive or negative—Editor.)

That doesn’t mean the stock is bullet-proof if we get a summer correction, but it should give us some support and strong rebound potential on the other side if it does suffer a slide. That being the case, I am not inclined to wait for a pullback here, regardless of my apprehensions about the market over the next few months

Like most foreign companies, Sadia’s dividend is not regular year to year, but it has doubled in the last seven years, so that ain’t chicken feed. Sadia S.A. is a buy up to $26. (The ADRs closed just below that Wednesday—Editor.)

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