Friday, April 17, 2015

Seaboard Corp (SEB): The Other Protein Trade

This is a post I wrote up a while back and never published as Kraft/Heinz and other things happened.  Anyway, here it is:

In December 2011, Leucadia (LUK) bought 79% of National Beef.  They explained the purchase as a play on the rising consumption of protein around the world as incomes rise in emerging economies (as poor countries get richer, they eat more meat).   Most important, though, is that they liked the management.

From the 2011 LUK letter to shareholders (still Cumming/Steinberg):
As our faithful investors know well, we have long watched and commented on global commodity consumption patterns. We continue to believe that as citizens of historically poor countries get richer they will demand higher quality items . and more of them. We believe this thesis is applicable to global protein consumption. While protein production and consumption in the U.S. is a mature market and is not growing, global protein consumption is growing at an astounding rate. U.S. beef exports were up over 22% in 2011 vs. 2010. This is an impressive number, made even more so by the fact that the U.S. is not allowed to export beef directly to China . not yet, anyway. 
and then after some detail about National Beef, they conclude:
In October the number of people on the globe reached 7 billion and is expanding exponentially. Humans need protein, we have it! 
And about management: 
We would not have made this investment were it not for our belief that we have the best management team. Tim and his management team are widely regarded as the best operators in the industry and we have confidence that these seasoned beef executives will guide National Beef through the inevitable rough patches. 

Also, at the 2012 annual meeting,  Steinberg said that the LUK portfolio was geared for inflation, and that if you don't believe inflation is coming, you should sell LUK stock.   Well, he was certainly right about that.  Inflation hasn't come yet and LUK stock also has done nothing since then.   I think for LUK, this "protein trade" sort of fit into that scenario.

And just as a refresher, here is a spreadsheet I put together at the time showing what the National Beef business was like:

National Beef Financial Summary

NetCost ofGrossSGA%OpOperPretaxPretaxsoldEBITDAEBITDA
salessalesmarginSGAsalesD&AincmarginincomemarginCapex(bn lbs)EBITDAmargin- capex
3 years6,0365,6995.56%480.80%482403.95%2193.59%534.02884.76%235
5 years5,9075,6314.62%460.78%431873.12%1612.67%524.02293.84%177
10 years4,9514,7503.91%380.75%331312.52%1082.06%403.71633.16%123

I only put this here for reference, so hold this thought for a second.

Seaboard Corp (SEB)
Anyway, at the time we looked at another protein play.  Check out the original post.  National Beef hasn't been doing too well, but SEB has been doing really well.  Here is an update on their long term performance:

Net Net TotalShareholders'BPS
5 yearaverage15.02%13.18%1.40
10 yearaverage17.09%15.44%1.41
20 yearaverage12.22%12.19%1.19
All dataaverage12.31%12.31%1.17

(ROE is return on beginning equity)

And in the original post, I compared SEB to BRK and the S&P 500 index (total return).  Since it's good to look at things through cycles, I used December 1999 as the starting point as that was sort of a big, major top.  I think I used the end of 2000 last time, but here I changed it to 1999-end.

SEB BPS versus BRK BPS and S&P 500 Index Total Return  (Dec. 1999 = 100)

SEB has done really well and has continued to outpace the market and BRK.

Here is the performance over various time periods:

                                      SEB              BRK          S&P 500 (total return)
One year:                      +11.5%           +8.3%      +13.7%
Five year:                     +13.2%         +11.6%      +15.5%
Ten year:                      +15.4%         +10.1%       +7.7%

Since 1989:                  +12.3%         +15.2%       +9.6%
Since 1999:                  +14.7%           +9.4%       +4.3%
Since 2007:                  +11.4%           +9.4%       +7.3%

SEB and BRK are annualized changes in BPS, and yes, I know the BRK BPS growth rate is understated.  Look at the performance from the two peaks, 1999 and 2007.  Good stuff.

There is a question as to whether SEB can be valued using book value.  Typically, operating companies like this are not valued using book value.  But I found it to be a convenient measure for SEB because they seem to operate as more of a capital allocating conglomerate like some of the others we talk about here.  SEB has evolved over the years by buying and selling businesses so it seems like a good idea to see how value has been added over the years.

Also, the businesses they are involved in seem to be cyclical so it's hard to take any given year's earnings and slap a P/E multiple on it.  If we see some consistency in ROE or growth in BPS over the years, it would be easier to value the whole based on that; what kind of ROE or BPS growth have they achieved in the past?  What is a normal rate of growth through cycles?  What is a normalized earnings level based on current equity capital?  And then what kind of multiple can we put on that?  Or what kind of multiple to BPS is fair for the business?

So anyway, there are a lot of ways to look at this, but BPS for me seemed like a good way.

The short term returns above (one year and five year BPS growth) is higher than BRK's BPS growth but lower than the S&P 500 index total return.   As many have pointed out (to explain their own underperformance), that is due to the S&P 500 index coming back from a crisis low.

On a ten year basis, SEB has done really well compared to both BRK and the S&P 500.  SEB lags BRK on the measure starting in 1989, but not many can outdo BRK over that long a time period.

But SEB has beaten both from the two recent peaks; 1999 and 2007.

So What's it Worth?
SEB's biggest business is the pork production and processing business.  My impression has been that this business doesn't usually carry a high multiple.  Smithfield Foods was taken out in 2013 at 9.4x EV/EBITDA and 14x EBIT (using the announced $7.1 billion figure).

Here is the table from the August 2013 Smithfield merger proxy showing valuation of listed comps:

  2013E P/E  3-Yr  Avg
Proj P/E
  EV / 2013E
  3-Yr  Avg
EV / Proj
Range of the selected companies
  11.2x - 20.4x  9.5x - 18.5x  5.8x - 11.8x  4.6x - 8.5x
Range of the selected Protein companies
  11.2x - 15.3x  9.5x - 18.5x  5.8x - 7.4x  4.6x - 8.1x
Range of the selected Packaged Meats companies
  16.6x - 20.4x  11.3x - 16.2x  8.3x - 11.8x  6.1x - 8.5x
Hormel Foods Corp
  20.4x  16.2x  11.8x  8.5x
Hillshire Brands Company (1)
  19.6x  N/A  9.5x  N/A
Maple Leaf Foods Inc.
  16.6x  11.3x  8.3x  6.1x
Sanderson Farms, Inc.
  15.3x  18.5x  7.4x  8.1x
  11.2x  13.3x  6.8x  7.0x
Tyson Foods, Inc.
  11.4x  9.5x  5.8x  4.6x
The Company
  10.9x  9.2x  6.9x  5.6x

And here is a list of precedent transactions:

Announcement Date
Value /
Michael Foods GroupThe Goldman Sachs Group, Inc.7.7x
Pilgrim’s Pride Corp.JBS SA8.0x
StarkistDongwon F&B Co., Ltd.7.8x
Swift & Co.JBS S.A.7.7x
Premium Standard Farms, Inc.Smithfield Foods, Inc.6.0x
ConAgra Foods, Inc. Branded Meats BusinessSmithfield Foods, Inc.5.8x
Sara Lee Corp. European Meat BusinessSmithfield Foods, Inc.6.0x
IBP, Inc.Tyson Foods, Inc.7.3x
As part of its analysis of precedent transactions involving companies in the meat/protein industry, Barclays calculated and analyzed, among other things, the ratio of the transaction value to LTM EBITDA, based on such target company’s LTM EBITDA for the twelve months prior to the transaction.
All of these calculations were performed based on publicly available financial data. The results of this precedent transaction company analysis are summarized below:

Transaction Value/LTM EBITDA

The bankers concluded that 7-8x is a fair multiple to use for Smithfield.

Hillshire Holdings was acquired by Tyson last year for 16.7x ttm EV/EBITDA, but (according to Tyson) 10.5x ttm EV/EBITDA if you include $300 million in expected synergies.

Let's look at some metrics of Smithfield and Hillshire:

                         Operating                  EBITDA
                         margin                       margin   
2009                 -1.8%                         0.4%
2010                  0.6%                         2.7%
2011                  5.1%                         7.0%
2012                  5.5%                         7.5%
2013                  3.8%                         5.6%      
average              2.6%                        4.6%

                         Operating                 EBITDA
                         margin                      margin    
2010                 4.6%                         8.0%
2011                 5.8%                         8.8%
2012                 1.9%                         6.0%
2013                 7.6%                       11.3%
2014                 7.5%                       10.7%       
average             5.5%                         9.0%

Now go back and look at the spreadsheet for National Beef at the top of this post.  You will see that margins in this business tend to be really low.  Even for companies with value-added products like Smithfield and Hillshire.

Now look at the metrics for SEB's pork segment:

SEB Pork Segment:
Five years13.33%16.13%
Ten years9.68%13.35%
This is segment information from the 10-K, so there would be other costs not included here (corporate).  So this may not be directly comparable to the above comps.  But if you take the unallocated expenses (corporate expense not allocated to any of the operating segments), it still amounts to less than 2% of the sales of the pork segment.  So if you allocated ALL of that corporate to the pork segment, it will reduce margins in 2014 by 2%.

Valuation Matrix
OK, so I was working on this post before I wrote up the stuff on MKL.  But I was sort of thinking the same thing in evaluating MKL.  Why not use some sort of valuation matrix by taking some normalized level of earnings and some sort of earnings multiple on it?   Another way to look at it is to look at SEB as a sum-of-the-parts of the various segments, but you will notice that each segment tends to have volatile earnings so it's hard to see what a normalized level of anything would be.

So I figured looking at the whole might be easier. 

Going back to the above long term performance table, you will notice that since 1989, SEB grew BPS at 12%/year.  This is the same as ROE (return on beginning equity, in this case).

Of course, we can just look at the historic P/B ratio and say that SEB should trade at 1.2x BPS because that's the average it has traded at since 1989.  Or maybe it should trade at 1.4x BPS because that is what it has traded at in the last five and ten years.

For the record, SEB has traded at an average of 14x P/E since 1989, and around 11x P/E for the last five and ten years.

Judging from the long term performance, it's probably pretty clear that 1.0x - 1.2x BPS is pretty cheap.  Five and ten year growth in BPS has been 13% and 15% respectively.

So let's say a long run, normalized level of earnings at SEB is around 12% ROE.  And then let's say that SEB has such a great performance that it should trade at least as high as what the average U.S. company has traded at over time (14x P/E).

Pulling out the valuation matrix, we get:


1.7x BPS might be a fair value of SEB if it continues to earn 12% (or grow BPS by that much) over time and it trades at a long term average multiple of U.S. stocks.

If SEB trades at it's own five to ten year average multiple of 11x and continues to grow BPS at 12%, then it's worth 1.3x BPS.  

With growth of 10%/year, at 11x P/E, that's a 1.1x multiple.  At 14x P/E, it's worth 1.4x BPS.

SEB closed yesterday at $3,670/share, or around 1.6x BPS.  It's seems a little high on a historical P/B basis, but if SEB's performance since 2004 is structural and not cyclical, then it is possible that SEB trades at a higher P/B in the future.

The sharp rally in 2014 was probably due to the abnormally high profits they earned in the pork segment (due to spiking prices caused by the pig virus), and also probably as a Cuba play.  SEB may well benefit from any increasing trade with Cuba (Marine segment) but who knows.

SEB is doing well.  Some short term factors may have pushed the stock price up too much, but looking at the tables above, it looks like there also may be a reason for SEB to trade at a higher valuation over time than before.  It does seem to be a higher quality business than some of the comps.  


  1. Seaboard seriously smells. Factory farming is the nastiest industry that exists, though I guess that would change if we legalized human slavery.,9171,140572,00.html

    1. Thanks for posting the article. Nothing new or interesting there other than that "something in it for Harry". Hopefully, that sort of thing doesn't happen any more. It's a different time now so I would be surprised if does.

      As for corporate welfare, unfortunately, that's just the way it works. The world bank subsidizing GE/Boeing, States/towns 'bribing' German and Japanese companies to build factories in their town etc.

      It happens all the time in NYC too. Every time a major lease is about to expire, corporations run to city hall in NYC to get a tax break, and NJ of course, comes calling with big tax breaks etc... "Give us a tax break or we're moving HQ to Jersey!".

      It's just the way the world works. I don't really like it when I read that stuff in the paper, but should local governments be banned from offering such incentives to corporations? I don't know. For some, that's the only lever they have to get people to move there.

      As for factory farming, well, people have to eat. And even my favorite food author Michael Pollan says that it's probably not possible to feed our population out of real, old-fashioned farms. And it's not just hog farms that destroy neighborhoods. NIMBY (not in my back yard) is a common problem, but these things have to be built somewhere... Things can improve for sure, and I think the world is moving in that direction of improvement.

      Anyway, thanks for dropping by.

    2. I need to agree with kk on this. If we want to feed people affordably, factory farming is here to stay. Grass fed beef from your local farmer, even when buying half a cow and storing it in the deep freezer, still works out to about $8/lb (excluding electricity for the freezer).

      A lot better than the prices at Whole Foods. But not quite cheap.

  2. Hi kk,
    do you have any updated thoughts on LUK? I really liked the recent shareholder letter, the FXCM deal was awesome and the stock is very reasonably priced which can't be said of too many companies these days.

    1. Hi,

      Not really. I've thought of posting an update every now and then, but have no new thoughts, really. I think they are well run and it's good, but they are a different entity now than they used to be; part investment bank, part distressed investor etc.

      They have been restructuring the last couple of years, getting out of the crappy stuff and investing in other areas so it may take time for those to kick in.

      And yes, I do like the letter as it was detailed and they got into all the different areas of the business, just like Cumming/Steinberg used to do (with a different style, though).

    2. KK,

      I first found your blog while I was Googling for any kind of research on Leucadia. I bought it at 21 in 2011 and sold it at 27 in 2012. I hadn't expected they would be trading at 22 in 2015. It was a close shave.

      I remember you had written a blog post a few years ago that Steinberg said in the LUK annual meeting that he himself would buy stocks like KO for his personal portfolio and not LUK-type assets.

  3. I've been slowly wading through the SEB annual report. I note they pre-pay dividends. When I first looked at them, I wasn't interested because I assumed they weren't paying dividends. Do you have any thoughts about valuing them using an owner earnings approach? When I do a quick back of the envelope, OE comes out below EPS, but I'm pretty sure I'm making a rookie mistake somewhere...

    1. Hi, the prepaid dividends, I think, was to get dividends out before the tax hike on qualified dividends, which was lower due to the Jobs act of 2003 or something like that. Other companies did that too.

      As of owner earnings, as you can see, SEB is and has been growing. So to get a pure figure, you have to look at what maintenance capex would be and see what the OE would be excluding capex for growth.

  4. I appreciate the write-up. SEB is my largest holding and since there is no analyst coverage/estimates it's not super easy to stay on top of. With CEO Steven Bresky controlling around 75% of the shares, I've wondered if he might eventually try to take the company private. He's known to not enjoy the spotlight and would rather focus on running SEB, from what I understand.

    BTW, the "prepaid" dividends a couple of years ago were (without saying so) to avoid the 3.8% Medicare surtax because I'm sure Bresky is in the bracket subject to the surtax.

    1. Hi, I don't know if Bresky would want to take it private. They've been public a really long time. And they are listed as a "controlled corporation" under NYSE rules so they are exempt from some stuff that would be a pain for them. But who knows?

  5. PS - I should have included that starting in 2013 the tax rate on qualified dividends for upper income taxpayers increased to 23.8% instead of 15%. SEB most likely paid out several future years of dividends in December 2012 to capture those at a 15% tax instead of a 23.8% tax for some of its shareholders.

  6. In relation to the 2014 rally, from what I recall, its start seemed to coincide with the repurchase tender (when I think it was trading around 1.2x BPS). I was thinking that the repurchases themselves and the indication that the company thought its shares were undervalued could have driven, or at least contributed to, the rally.

  7. Have you looked at Nicholas Financial (NICK)?

    I won't go into detail but they are in the sub-prime auto loan business. They develop relationships with specific dealers and issue loans to customers (well, technically they purchase loans from dealers at a discount to face-value, but they pre-approve the loans and fund 90%+ of the value).

    Their track record looks decent despite relatively low leverage vs comps (pre-tender liabilities/equity of 0.9, BPS compounded at 11.6% over the last decade plus some special dividends and much faster growth in the 90's when they were smaller).

    The old guard who built the company is out (Vosotas, he's 71) and current management just completed a tender offer which reduced shares outstanding by 38%. This allowed Vosotas to cash out and since shares were tendered at about 1.15x book it can be expected to somewhat lower BPS and sharply increase EPS and ROE.

    It came to my attention because MKL has had a position a couple of different times, though never of significant size (NICK is a pretty small fish compared to MKL).

    Thanks as always for blogging, and sorry for being a bit off-topic but this looks like the sort of thing you might enjoy exploring.

    1. Hi,

      Yes, I owned that for a while before. I haven't taken a close look recently, but I should. Thanks for the reminder.

    2. I'd be interested to hear your thoughts on NICK, especially since you've owned it before. I hate to over-weight financials too much, but these days I'm having trouble finding values anywhere else.

      Oh, and I did own SEB at one point before and did pretty well with it. I came across your earlier write-up at that time, so thanks again --- I enjoy your blend of informal conversational style with data-driven analysis.

  8. Speaking of potential compounders, have you ever looked at First Pacific (00142 in HK)? ~20% CAGR in book. It has so many moving pieces and such a storied history. Tricky to get a read on it.

    1. Hi, yes, it's interesting but I always find it hard to get a grasp of these things so far away. I read about U.S. businesses in detail all the time and have followed many people over the years so feel like I have some comfort level that goes beyond just what's on the balance sheet/income statement. But for non-U.S. stuff, even if the metrics look good and valuation cheap, it's hard for me to get a feel for the people running the business, reputation, how the stock trades (some are always trading at a discount and for good reason etc...).

      So that's where I have trouble with non-U.S. stuff. For example, I can be this confident and pound the table on JPM because I've been following Dimon for years, have friends who have worked under him so I heard many stories from first hand observers (which basically confirm what we know), I've read books about him (including books like Too Big to Fail which are indirectly about him), listened to basically every conference call for years etc...

      It's hard to get that sort of familiarity and comfort (for me) with non-U.S. stuff.

      That doesn't mean First Pacific is not a good idea, of course...

    2. Thanks for your response. I take your point re: familiarity. I'm in Australia, so am closer to Indonesia, but have no special feel for these things.. I'm really conscious that I *want* to like the company, which is a red flag. Your point re how the stock trades is a good one. First Pacific trades at a pretty steep discount, and always has. The optimist says over 10-15 years that will probably change, but you've gotta be pretty sure of a company to intend to hold it like that.

      They've just closed a Joint Venture takeover (with Wilmar) of an Australian company called Goodman Fielder who make packaged food goods. The company has gone from profitable to losing money, being squeezed by the supermarket duopoly here. It will be an interesting litmus test for them, they want to turn it around and export to the Asia Pacific.

      It seems the company has a few key profitable businesses, and sort of acquire/divest things in a haphazard way. It seems a bit slipshod.

      On an unrelated note, haven't seen any chatter on this yet:

      Very smart move from Buffett. It reminds me a little of FRMO (maybe Warren is a reader?! Haha).

      The Australian business press isn't quite sure what to make of it. If you can find it, there's a show on ABC tv here called The Business that interviewed IAG's CEO.

      There's a video of WEB floating around addressing IAG staff too.

      Thanks again,


  9. FYI in (beef) slaughterhouse conditions:


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