Time to Revisit the Farm

 | Sep 21, 2011 | 2:00 PM EDT  | Comments
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Stock quotes in this article:

de

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cf

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cresy

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irs

,

BRCPY

All things agricultural have treated investors very nicely over the past couple of years. The fundamental argument that food supply continues to tighten relative to the global population needs is a hard fact to argue with. As a result, strong crop prices have boosted farmers' profits, which, in turn has created value for investors in fertilizer companies, seed businesses and agricultural equipment companies. Deere (DE) shares have recovered from the recession and then some. The fertilizer giant CF Industries (CF) is trading at $162, significantly above its pre-recession value.

Despite continued profit growth, shares in the Argentine agricultural company Cresud (CRESY) have slipped back to $12.50 a share from a high of $20. Cresud is an incredibly unique business that, if understood properly, is a collection of assets that offers immense value in any possible economic scenario. Investors would be well served to take a closer look at this business since it offers a lot of upside potential. In the meantime, I'll reintroduce you to its potential.

Cresud is a collection of two principal assets: agriculture and real estate. It's real estate business is primarily a 57% equity stake in the Argentine real estate company IRSA Investments and Representations (IRS), a stake that is worth $338 million based on IRSA's current market cap of $594 million. It should be noted that IRSA's current share price of $10 is near a 52-week low. The company is Argentina's largest and most-diversified real estate company.

Cresud's agricultural operations consist of owned and leased crop, cattle and dairy farms primarily in Argentina, and has a growing presence in Brazil, Bolivia and Paraguay. Cresud's Brazilian agricultural operations primarily consists of a 35.75% stake in BrasilAgro (BRCPY), which is worth $162 million, based on a market cap of $428 million..

Cresud currently has a market cap of $628 million. Deducting the values of IRSA and BrasilAgro implies that the equity value of Cresud's other operations are worth $128 million. The company's largest asset is made up of 26 owned farms covering some 474,000 hectares, of which, 230,000 hectares (ha.) are naturally preserved woodlands. The remaining 244,000 ha. are used for crop, sheep, cattle, and milk production. In addition, CRESY controlled or leased nearly 200,000 ha. to further leverage is agricultural production.

Another major part of Cresud's business is the buying and selling of farms and farmland. For decades, management has perfected a model of buying cheap, raw land, converting it into productive land and selling the land when the price makes sense. Looking over the company's past five years' worth of land sales, Cresud typically earns a gain of 2x to 5x stated book value. In the most recent fiscal year, CRESY sold its large La Juanita farm for $18 million, booking a gain of more than $12 million, a gain of 228% over book value.

Cresud's annual filings show that the value of its "property and equipment" on the balance sheet is at approximately $830 million. The largest asset is the 240,000 ha. Los Pozos farm, which was acquired in 1995. In fact, more than two-thirds of the company's land was bought more than a decade ago. Given the company's consistent history of monetizing land at prices well above book value, its highly probable that the book value is vastly understated. Giving consideration to the fact that the woodlands probably aren't appreciating as much as agricultural land, think it's probably fair to say that Cresud's land is worth at least 2x to 2.5x book value of $830 million. That would imply a value of $1.1 billion for the farming operations.

Add to that the company's publicly traded assets and the total value is $1.6 billion against an EV of $1.1 billion, a near 50% upside. That might not seem like much but remember that equity valuations for IRSA are depressed at the moment. Also, do not minimize the fact that during periods of inflation and monetary expansion, the appreciation prospects of farm land are very strong. Cresud's assets are unique; over time its income-generating potential and asset appreciation will produce a bountiful harvest for investors.

 

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