Market Expansion Into Japan And South Korea May Open New Avenues, But Shrinking Margins And Global Trade Risks Persist

Key Takeaways

• Diversified business model and market expansion could drive revenue growth and capture diverse market opportunities with premium pricing.
  
• Operational efficiencies, cost controls, and strategic partnerships may enhance margins, reduce debt, and improve shareholder returns.
  
• The company's dependency on beef demand, reduced cattle supply, and global trade uncertainty with China could threaten revenue and profitability.

Catalysts

Through its subsidiaries, operates in the food industry in Brazil and internationally.

• Marfrig's diversified business model, which includes a focus on higher added value products and market expansion, is expected to drive future revenue growth as they capture diverse market opportunities and enhance product offerings.
  
• The company's integrated feedlot operations are anticipated to provide a consistent cattle supply and improved beef quality, potentially supporting higher margins due to enhanced product quality and better pricing dynamics.
  
• Market expansion, particularly into high-value international markets like Japan and South Korea, could increase revenue and improve the profitability mix as these markets offer premium pricing opportunities.
  
• Marfrig's ongoing focus on operational efficiencies, cost controls, and debt reduction suggests potential improvements in net margins and earnings, as reduced financial expenses and leverage can enhance shareholder returns.
  
• The strategic partnership with BRF is expected to unlock further synergies and cost efficiencies, potentially leading to higher earnings through shared resources and enhanced market presence.

Marfrig Global Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Marfrig Global Foods's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 1.1% today to 0.1% in 3 years time.
• Analysts expect earnings to reach R$188.7 million (and earnings per share of R$0.65) by about March 2028, down from R$1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 150.6x on those 2028 earnings, up from 8.1x today. This future PE is greater than the current PE for the BR Food industry at 8.8x.
• Analysts expect the number of shares outstanding to decline by 4.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 22.67%, as per the Simply Wall St company report.

Marfrig Global Foods Future Earnings Per Share Growth

Risks

• The company's dependence on strong beef demand despite rising beef prices poses a risk as declining consumer purchasing power or changes in consumer preferences could negatively impact revenue and margins.
  
• The forecasted decline in fed cattle supplies in the United States is expected to result in lower capacity utilization, which might not align with strong beef demand, potentially affecting EBITDA and net margins.
  
• Declines in the values of drop credit items, particularly hides and tallow, have already contributed to lower EBITDA margins in North America, and such trends may continue, impacting revenue and profitability.
  
• High leverage levels, although reduced, could pose a risk if economic conditions change and borrowing costs increase, potentially affecting net earnings through increased financial expenses.
  
• Uncertain global trade relations, particularly with China—a significant export market for Marfrig—pose a risk to revenue, given the potential for regulatory changes or tariffs that could affect export volumes and profitability.

Valuation

• The analysts have a consensus price target of R$19.95 for Marfrig Global Foods based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$25.5, and the most bearish reporting a price target of just R$16.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$173.3 billion, earnings will come to R$188.7 million, and it would be trading on a PE ratio of 150.6x, assuming you use a discount rate of 22.7%.
• Given the current share price of R$15.8, the analyst price target of R$19.95 is 20.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.