Overvaluation Will Drive Margin Erosion In Beef Industry

Key Takeaways

• Persistent optimism hinges on robust global beef demand and efficiency gains, supporting higher margins and diversified, resilient revenue streams through export expansion.
  
• Positive sentiment centers on merger synergies, focus on value-added products, and improved cash flow fueling elevated shareholder returns and valuation expectations.
  
• The Marfrig-BRF merger positions the company for improved margins, export resilience, higher-value products, operational efficiencies, and enhanced shareholder returns through financial and structural advantages.

Catalysts

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

• Current valuation likely reflects investor expectations that global beef demand-especially from China, Europe, and emerging export markets-will remain exceptionally strong over the coming years, continuing to support higher realized prices and revenue growth as new export markets are accessed and expanded.
  
• Market optimism around sustained high operating efficiency in South America (e.g., increased industrial capacity, higher share of processed/branded products, operational excellence, and new certifications) is contributing to elevated expectations for net margin expansion.
  
• Anticipated synergies from the ongoing merger with BRF (management signaling R$800 million+) and a post-merger focus on value-added, branded, and processed products are expected to raise EBITDA through a more lucrative sales mix, driving overall earnings higher.
  
• Investors appear to be pricing in a long-term step-change in free cash flow and dividend payouts given deleveraging, increasing cash generation, and Marfrig's history of aggressive shareholder returns, thus elevating valuation multiples.
  
• The stock price may also be incorporating the belief that advances in supply chain management, cold chain logistics, and regulatory approvals (e.g., antitrust rulings) are removing operating barriers, allowing for greater export volume diversification and more resilient, less cyclical revenue streams into the future.

Marfrig Global Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Marfrig Global Foods's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 1.0% today to 0.6% in 3 years time.
• Analysts expect earnings to reach R$1.0 billion (and earnings per share of R$1.36) by about August 2028, down from R$1.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$6.2 billion in earnings, and the most bearish expecting R$-755 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.8x on those 2028 earnings, up from 12.3x today. This future PE is greater than the current PE for the BR Food industry at 10.5x.
• Analysts expect the number of shares outstanding to decline by 6.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.15%, as per the Simply Wall St company report.

Marfrig Global Foods Future Earnings Per Share Growth

Risks

• The merger between Marfrig and BRF is expected to generate at least R$800 million in well-mapped, near-term synergies, including efficiency gains, tax credits, and scale advantages across production, marketing, and supply chain; these could materially improve EBITDA margins, net income, and free cash flow for the consolidated entity.
  
• Marfrig/MBRF has demonstrated the ability to redirect production and sales channels in response to market shocks (such as avian flu, new tariffs, or export restrictions), successfully maintaining or even expanding export growth to key markets (Europe, China, Middle East, and the US), supporting top-line revenue resilience and earnings stability.
  
• The company's ongoing shift toward higher value-added and branded products, coupled with increased processed product mix (now 39% of portfolio), is raising average selling prices and margins, thus cushioning earnings against commodity price volatility and driving sustainable long-term profit growth.
  
• Investment in operational efficiencies-including new facilities, expanded slaughtering and processing capacity, feedlot integration, automation, and tax-advantaged CapEx-is reducing per-unit costs and enabling the company to sustain or expand margins even in low parts of the beef cycle, supporting both EBIT and net income over time.
  
• BRF/Marfrig's robust capital structure following the merger (leverage targeted at or below 3x EBITDA), access to significant tax credits for investment, growing net income/dividends, and potential for US listing (which could lower cost of capital and improve share liquidity) all point to improving returns to shareholders and enhanced financial flexibility, mitigating traditional industry risks and supporting increased shareholder value.

Valuation

• The analysts have a consensus price target of R$22.854 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$30.0, and the most bearish reporting a price target of just R$17.4.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$182.7 billion, earnings will come to R$1.0 billion, and it would be trading on a PE ratio of 27.8x, assuming you use a discount rate of 21.2%.
  
• Given the current share price of R$23.4, the analyst price target of R$22.85 is 2.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.