Today, Seaboard Corporation reported earnings after the bell. The numbers were not stellar and the company actually reported a 3% decline in net income in 2006 when compared to 2005, although sales were up. The departure of Harry Bresky, the original founder, from the board of directors was also announced. These might have some deflating effects on the company's stock price over the coming days, though I am not too sure how much as the company is off about 15% from its recent all time high of $2,300.
So, I suppose it is not stellar earnings growth, but regardless, Seaboard paid down $91M in debt, generated $284M in operating cash flow, paid out $3/share of dividends to shareholders, and added more cash to the balance sheet. With the added cash and reduced debt, even without a further decline in the company's stock price, SEB should be at less than 2x book value. SEB also added $230M in shareholders' equity, which is a key metric of the company's overall worth.
In the company's annual report to shareholders, Steven Bresky, current CEO and son of Harry Bresky, the company's founder that has formally retired as of today, there was brief discussion of the company's stock price and it's recent performance. While the ascent has been exciting, the recent activity, especially the past month, is likely more of a spike during an uptrend rather than an actual realistic valuation of the company. From a today standpoint, he is likely correct. However, I think in the coming years, SEB is in great position to add additional value to shareholders by creating shareholders' equity at a $240M year clip. In short, I think that translates into a $300-$400 per year stock price appreciation, at least over time.
It's funny as I just looked back at the 5 year stock price of the company and back in 2001, SEB was trading at around $200 per share. Fast forward 5 years, and the stock is trading about $1,800 higher. How is that for 5 years at $300-$400 per year - it's right on - it just did not happen cleanly over the course of 5 years; it happened pretty much all at once over about 2-3 years. So, as of today, SEB is probably valued right where it needs to be, but looking 5 years out, SEB is cheap. This is good as the market has not yet priced in SEB's future performance; it might take sometime, but eventually, that will come into play and should push SEB to $2,800-$3,000 sometime within the next 12-18 months.
This is a company I wish I could own outright. A cash producing machine that has made the founding family worth about $1.8 billion and yields them about $2.4 million in annual dividends, not to mention Steve Bresky's annual salary of $1.5 million. Not bad. Although $2.4M and $1.5M is a lot of money either way, note that the Bresky's, as owners, are making most of their money by owning the shares via the dividends. Even when you exclude the $1.8 billion of worth they have and take into consideration SEB has a payout ratio of only 1%. Note the payout ratio is defined as: "The percentage of a firm's profits paid to shareholders in the form of dividends."
Compare to some firms that payout 25%-50%, 1% of profits back to shareholders does not seem very generous, but in the case of SEB, it is not like the officers are padding their pockets. Sure, they get paid well and far more than most of us will ever make, but they are not taking 8 digit salaries; there is no issuance of stock or stock options causing dilution to the owners of the company; and there is proven performance in the business model to generate cash flow and shareholders' equity.
I like SEB a great deal and it is a fantastic ownership investment. I like where it is now because there seems to be limited downside to its stock price. Sure, it is subject to fluctuations and may decline some more, but in all fairness, it has had quite a huge run up the past 36 months and even the past 6 months. Regardless, based on what it tends to produce in shareholders' equity, which really is the true measure of the worth of a company, as of today, it is likely not undervalued, nor is it overvalued. The secret is somewhat out of the bag on this one and I believe SEB will continue to show strong results from operations going forward and if you can forecast out to 2010, it is clear SEB is undervalued at today's trading price. Prepare for a possible double, and while it won't happen in 1 year, I do not think, it is not going to take 7 years either.
On top of that, I have decided to quite possibly take a road trip - April 23-24, 2007. So, where am I going? Well, this is me we are talking about, so in that spirit, I may find myself visiting Shawnee Mission, KS and Overland Park, KS on these days. April 23 is the annual meeting of Seaboard Corporation and right down the street about 3 miles away is Ash Grove Cement in Overland Park. I might go pay them a visit, too. After all, I do own the company...both of them actually :-).
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