Thursday, June 5, 2014

SEB is Trading Near Tender Price

Seaboard Corp's tender offer is due in a week. And the stock is approaching the maximum tender price. The price today reached $2920. The maximum tender price is $2950. Volume at this price has been more than daily average. So, when I try to guess the intentions of the buyers and sellers, I can only deduce one thing. The market does not think that the stock is worth the tender price, and the company will not be able to buy Seaboard stock with all the allocated $100M.

Several news items are affecting the Seaboard stock recently. Seaboard announced quarterly earnings of $40.55 per share compared to $47.98 a year ago. Revenue was also down slightly versus a year ago. However, operating income actually rose compared to a year ago. The operating income rose but net income fell because the company benefited from a one-time tax benefit last year. This means that last year was the anomaly and this year is the norm. The company now trades at 18 times TTM earnings.

Pork prices have jumped by more than 30% recently. I am not exactly sure why, but there has been some kind of pig virus spreading about.

The other news is that Pilgrims and Tyson Foods are in a bidding war for Hillshire Brands. Hillshire Brands in turn is trying to buyout Pinnacle Foods. It looks like food company valuations are going up amidst consolidation. In 2013, Smithfield Foods was purchased by Shuanghui. Nonetheless, Seaboard's return on equity is 7.8%. The company does not appear undervalued unless one believes that it is a takeover target. Seaboard trades at a EV/EBITDA of 10, while Pinnacle and Hillshire trade at 13.

Seaboard is my third largest position and I must consider taxes carefully if I want to close the position. I wrote about taxes in another another post but it doesn't really guide me on whether to sell. Today I have another way to think about taxes.

Suppose my Seaboard investment has gone up 100% over a long period. Also suppose the tax rate is 25%. If I sell it, the capital gain is $50 for every $100 that I should pocket. But the government takes a $12.50 tax on that, which leaves me with $87.50.  Suppose further that Seaboard returns 10% a year in the future. So, by the rule of 72, it doubles about every 7 years. Then that $12.50 which would be in Seaboard if I did not sell, would give me $12.50 in gains in 7 years.

So the fundmental question is: can I get a further $12.50 in gains in 7 years on my $87.50 if I sell Seaboard and buy something else? When put in this way, tax considerations become much more straightforward.

So I think soon I will sell or tender at least some of my Seaboard shares.

No comments:

Post a Comment