On Monday, BRF S.A. (BRFS) gained nearly 9%. That’s easier to do when you’re a penny stock. However, if Barchart.com’s Top 100 Stocks to Buy from yesterday is any indication, the Latin American food processor appears ready to go on a big run.
BRFS stock moved from the 91st position in the top 100 to the 35th spot, a move of 56 positions, making it the biggest mover in Monday trading. The stock’s weighted alpha was 170.26%, slightly higher than its 169% gain over the past 52 weeks.
The Barchart Technical Opinion suggests BRFS is a Strong Buy in the short term. Analysts, on the other hand, aren’t so confident. Of the five covering it, according to Barchart data, only one rates BRFS a Strong Buy, with an overall Hold rating (2.80 out of 5) and a mean target price of $2.86, well below where it’s currently trading.
It’s not any different with MarketWatch. Of the nine covering the stock, only three rate it a Buy, with a target price of $3.24, below its current share price.
However, yesterday’s move suggests the interest in BRF stock is worth exploring if you’re an aggressive investor.
Here’s why.
Unusually High Volume
In addition to gaining nearly 9% on Monday, BRFS had a volume of 5.65 million, 1.5x its 30-day average. While its options volume is typically light, it averaged 71 contracts per day over the past 30 days and was 70% higher yesterday.
Somebody is sniffing around.
Let’s consider why they might be.
The company’s stock is up 31% year-to-date and 169% over the past year. It last traded this high in September 2022, 19 months ago. Historically, it once traded as high as $27 in November 2014.
If you’re an aggressive investor, investing $3.50 today and getting $27 back in five years—a compound annual growth rate of 50%—is attractive. The risk/reward seems worthy of consideration at current prices, but only if you can afford to lose the $3.50.
Latest Results Were Healthy
The one thing you need to be aware of with companies like BRF is that they are attached at the hip to meat prices. When they go up, profits go up, and vice versa. In the near term, the company appears to be riding a recovery in meat prices and lower input costs (grain).
At the end of February, it reported Q4 2023 results, including its first quarterly profit in eight quarters. It earned 823 million reais ($165.3 million) from 14.43 billion reais ($2.76 billion), a 5.7% net margin, up from a net margin of -6.5% a year earlier. Analysts expected a net income of 339.6 million reais, less than half what it delivered in the quarter.
“There are variables that we do not control, which are demand and price,” CEO Miguel Gularte said in February. “But if you have predictive power, product, delivery, logistics.... you can capitalize on the good moments and the peaks of the cycle.”
How long can the good times last? For the remainder of 2024, demand and grain prices should remain favorable for the company, suggesting that a bet on its stock could play out for longer than investors might expect.
While revenues for all of 2023 were down 0.4% to 53.62 billion reais ($10.62 billion), its losses for the year declined by 40.5% to 1.87 billion reais ($360 million) from 3.14 billion reais ($600 million) in 2022.
In the Q4 2023 conference call, Gularte mentioned that BRF closed the year with its lowest leverage in the past seven years. Its net leverage was 2.01x, down from 3.55x at the end of 2022. Further, its international markets returned to double-digit margins by the end of 2023.
In the conference call, CFO Fabio Mariano stated that its quarterly free cash flow of 613 million reais ($117 million) was its highest quarterly cash generation in three years.
So, its business is getting stronger, with Q1 2024 expected to be even better than Q4 2023.
An Upgrade Certainly Helps
A big reason for Monday's gains was JPMorgan Chase analysts upgrading its stock to Overweight from Neutral. They believe the company’s robust international segment results in Q1 2024 should contribute to significant revenue and earnings growth in the quarter.
JPMorgan also noted that rising poultry export prices and a more balanced supply-demand situation should help internationally. As a result, their analysts expect Q1 2024 EBITDA to increase by 9.2% year-over-year to 1.82 billion reais ($348 million), with an EBITDA margin of 13.5%. In 2024, JPM expects BRF to generate EBITDA of 7.44 billion reais ($1.42 billion), 83% higher than in 2023.
Based on JPMorgan’s 2024 EBITDA estimate, it is trading at 5.2x its enterprise value, considerably below its 5-year average of 6.4x, which suggests it’s at least 20% undervalued.
Further, the analysts project that BRF will generate a free cash flow of 2.77 billion reais ($529 million) in 2024, a free cash flow yield of 10%. Anything above 8% is in value territory.
Here comes $5.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
