High-Quality Protein Push Fuels Growth Amid International Expansion Challenges

Key Takeaways

• Operational improvements and value-added product focus are expected to drive high margins and enhance net margins.
  
• Expansion and diversification efforts indicate strategic growth focus, likely to positively impact revenue and leverage increased capacity globally.
  
• Dependence on livestock cycles, geopolitical tensions, high leverage, and rising cattle prices pose profitability and earnings stability risks for JBS.

Catalysts

Engages in the processing of animal protein worldwide.

• Strong operational improvements and a focus on value-added products and brands are expected to continue driving high margins, as seen in JBS's poultry and pork segments. This could enhance net margins as these higher-margin products contribute more to revenue.
  
• The company's investment in expanding Huon Aquaculture and the new Seara facility in Saudi Arabia indicates a strategic focus on growth. This diversification and increased capacity are likely to impact revenue positively.
  
• JBS's reduction in net debt and leverage point to better financial health, which may improve earnings by reducing interest expenses and increasing free cash flow for reinvestment in growth initiatives.
  
• Expansion in international markets, particularly in Australia and a strong positioning in the U.S. and Brazilian markets, is expected to boost sales volumes and revenues, supported by high global protein demand.
  
• Strategic share buybacks and dividends demonstrate confidence in cash flow generation, potentially increasing earnings per share as the number of shares decreases.

JBS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming JBS's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 1.8% today to 1.7% in 3 years time.
• Analysts expect earnings to reach R$8.1 billion (and earnings per share of R$4.39) by about November 2027, up from R$7.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$6.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.5x on those 2027 earnings, up from 10.9x today. This future PE is lower than the current PE for the BR Food industry at 19.6x.
• Analysts expect the number of shares outstanding to decline by 5.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.88%, as per the Simply Wall St company report.

JBS Future Earnings Per Share Growth

Risks

• JBS's dependence on favorable livestock and cattle cycles poses a risk, as fluctuations in these cycles could negatively impact profitability, especially in regions like the U.S. where JBS Beef North America has faced challenges. This affects net margins and earnings.
  
• Rising Brazilian cattle prices, if uncorrected, could compress margins in JBS's Brazil operations, impacting revenue from international markets relying on cost-efficient exports.
  
• Geopolitical or trade tensions, particularly concerning U.S. exports, could disrupt international sales and hinder revenue growth if tariffs or trade barriers are implemented.
  
• The reliance on a small number of high-performing business units, like Seara and Pilgrim’s, could be risky if competitive pressures or market conditions change, potentially affecting overall earnings stability.
  
• High leverage and significant debt (net debt at $13.7 billion) mean JBS must carefully manage cash flows and interest payments to avoid financial strain, which could limit earnings growth and dividend distribution.

Valuation

• The analysts have a consensus price target of R$47.0 for JBS based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be R$466.5 billion, earnings will come to R$8.1 billion, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 17.9%.
  
• Given the current share price of R$35.65, the analyst's price target of R$47.0 is 24.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.