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Bunge Expects Resurgence of Commodities to Drive 2016 Growth

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Good start to 2016

Bunge (BG) released its first quarter 2016 results on April 28. The company’s earnings were consistent with its guidance and beat earnings estimates by 78%. The EPS (earnings per share) came in around $1.41 for the first quarter. However, EPS fell by 11% compared to the corresponding quarter a year ago. You can read about Bunge’s first quarter performance  in our post-earnings review.

Among Bunge’s major revenue contributors, the Agribusiness segment accounted for 70% of Bunge’s revenue in the first quarter with $6.2 billion in sales and 87% of total operating profit.

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Realizing earnings potential

Even though earnings and revenue fell in the first quarter and the second half of the year is expected to be seasonally weak, the company expects to see earnings and cash flow growth for the full year. Management feels that with a strong start to the year, the company will be able to achieve its expected earnings growth for 2016. The management forecasts that earnings will bounce back in the second half of 2016 and come in positive for the year.

Fundamentals in soy crushing, an important business for Bunge, are positive due to improvements in the soy processing environment. Meal and oil demand seems to be improving along with higher crush utilization rates. Margins should also benefit from overcapacity in the market. Normal conditions in Brazil foods and growth in global trade in grains and oilseeds are expected to result in bottom line improvements.

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Segmental expectations

In the Agribusiness segment, the second quarter doesn’t look so favorable due to weather conditions in South America. The weather hasn’t been favorable for crops in Brazil and Argentina. Ultimately, it will cause lower crush activity in Argentina and lower origination in export volumes in both countries. However, this is expected to help the margins in North America and the Black Sea in 3Q16 and 4Q16. It will also benefit oilseed processing, grain origination, distribution, and port elevation.

In the Food & Ingredients segment, the company expects better 2016 results led by its operational excellence initiatives and recent acquisitions. The company remains optimistic that improved volumes and margins in the Brazilian operations will continue in the second half of 2016 as well.

The Fertilizer segment is projected to benefit from increased purchases of crop inputs later in 2016 due to improved farmer economics in Argentina. A weaker peso and the removal of export taxes on grains contributed to improved farmer economics.

In the Sugar & Bioenergy segment, the company expects good earnings and cash flow growth due to the development of the sugarcane crop. The growth is also due to sugar price hedges and the Brazilian ethanol pricing outlook.

Competitors

Bunge’s peers in the food industry include ConAgra Foods (CAG), Archer Daniels Midland (ADM), and Ingredion (INGR). ConAgra and ADM saw their earnings fall 3% and 45%, respectively. On the other hand, Ingredion reported positive earnings growth of 34% in its recent reported quarter. The iShares Morningstar Mid Value ETF (JKI) invests 1.3% of its portfolio in ConAgra Foods.

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