Large Crops Filtering Helps Middleman Bunge In 2Q; Demand Of Caloric Foods In Emerging Markets Raise Hopes

Bunge (BG, Buy) surged nearly 8% higher as company reported solid second quarter earnings with solid growth which simply beat analyst estimates. The growth was led by solid oilseed processing margins and improved demand. The revenue of $16.79 billion was nearly $1.54 billion ahead of consensus estimation while earnings of $1.76 per share have beaten our estimates of $1.38 per share.

We noticed that solid global oilseed processing margins (due to higher turnout of southern hemisphere soybean crop and continuously increasing demand) drove Bunge to considerably higher results in agri-business. The sales in this area increased nearly 11 percent year over year to $12.86 billion. Sales in sugar and bioenergy trade were increased by 26 percent to $1.19 billion while milling products sales increased by 8.6 percent to $553 million led by the new wheat mills in Mexico which was bit offset with edible oil products sales falling by 12 percent to $2.1 billion.

Company gains economy of scale from solid capacity usage of its assets while significant crops filtering throughout its wide-ranging crop processing, transportation and storage amenities. In our view, agri-business created nearly $8.80 of operating profit per metric ton of volume in this quarter compare to $2 per ton in first quarter and $5 per ton in second quarter a year ago. South America and Southern Europe were strong in solid soybean crush margins compare to China and company would play on grain prices which are expected to go down this year compare to first quarter price rise due to weather conditions and geopolitical actions.

Company will try to take advantages of emerging markets like India where we predict solid demand of caloric foods. While company’s sugarcane milling trade is emerging, company will continue gaining from its edible oils and milling business in third quarter without any major disruption. While Bunge acts as middleman in a highly volatile business and faces severe competition in agribusiness and considering weather hindrance likely in coming quarter, we downgrade rating to ‘Hold’ from previous ‘Buy’ and limit price target to $74, which is 12 times of 2014 EPS estimates.

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