U.S. Barbecue Enthusiasm to Lift Earnings for Beef Giant Marfrig This Year

Brazilian beef producer Marfrig Global Foods SA sees Americans eating more meat this year amid a rebound in the U.S. economy.

Restaurants are reopening and government stimulus money translates to more spending on food. Combined with plentiful supplies of U.S. cattle, margins are set to widen for the North America unit, which accounts for 80% of the company’s earnings, said Tim Klein, chief executive officer at Marfrig’s National Beef, the fourth biggest U.S. meat processor.

“People will prepare more barbecues, will have more money to spend,” he said. “We are very optimistic.”

American producers of pork, beef and poultry are set for a record year of output, and U.S. consumers will eat more meat in 2021 than in any other year except last year at 224.8 pounds a person. That’s good news for processors like National Beef, which sold record-high volumes for two consecutive quarters due to solid U.S. demand for beef, Credit Suisse analysts led by Victor Saragiotto wrote in a note.

Marfrig’s stock is leading Ibovespa’s 0.2% gain, rising 5.6% to 16.47 reais each. Marfrig has soared over 10% in two days.

While the Covid-19 pandemic sickened workers and impeded operations last year, Marfrig doesn’t expect virus-related disruptions going forward. National Beef aims to vaccinate at least 70% of its 7,000 workers, and the immunizations have already begun. So far, more than half have agreed to get the vaccine, Klein said.

“Official estimates suggest cattle supplies will only reduce a little bit in 2022,” Klein said. “In the first and second quarters, our margins in the U.S. are expected to be at the same level or better than in the same period of 2020.”

Vaccinations of meat workers are starting to accelerate in the U.S., with some employees at JBS SA’s American subsidiaries already headed for a second dose. Cargill Inc. said it’s preparing to offer the vaccine to employees at three protein facilities, while Tyson Foods Inc. said it will give vaccinations to many of its 13,000 workers in Iowa this week.

In Brazil, where vaccine purchases by the private sector are not yet allowed, Marfrig doesn’t expect disruptions even as the nation saw record cases and deaths due to a recent Covid outbreak. “Our labor protocols are very safe,” said Marfrig Chief Executive Officer Miguel Gularte.

In the fourth quarter of 2020 Marfrig reported adjusted earnings before interest, taxes, depreciation and amortization of 2.1 billion reais ($361 million), exceeding the 2 billion-real average estimate by analysts tracked by Bloomberg. Sales and net income also beat estimates. Company Ebitda doubled to 9.6 billion reais in 2020 while net income was the highest ever reported.

“We were efficient in buying cattle, processing it and selling the final product in North and in South America,” Marfrig’s Chief Financial Officer Tang David said in the same interview.

The challenge in Marfrig’s South American operations is the sharp rise in cattle prices.

“Margins are very tight in Brazil and in Argentina,” Gularte said, adding that the impact of reduced income aid on consumption is still unknown.

Key Insights

  • Company plans to grow organically in processed food with attractive opportunities in M&A lacking, chairman Marcos Molina said in a call with analysts.
    • “In general, these processed food companies are expensive,” he said.
  • Processed food will see “robust” growth in 2021, after the segment’s sales increased 62% last year, Gularte said.
  • Cattle supplies will return to normal at a certain point, because current tight supplies are due to females being retained to build herds, Gularte said.
  • China is still demanding beef, and Brazilian companies are well positioned to supply the country.
  • Marfrig is proposing dividends of 141 million reais to the board.

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