Seaboard Corporation – Currently Listed as ‘SEB’ on the American Stock Exchange

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Company Overview

Seaboard Corporation (“SEB”) is a diversified business with operations situated within the agriculture and transportation businesses. In the latest 10-K Filing, Seaboard Corporation summated their operations in the proceeding fashion:

Seaboard Corporation and its subsidiaries (collectively, “Seaboard”) together comprise a diversified group of companies that operate worldwide in agricultural and ocean transport businesses. Seaboard is primarily engaged in hog production and pork processing in the United States (“U.S.”); commodity trading and grain processing in Africa and South America; cargo shipping services in the U.S., Caribbean and Central and South America; sugar and alcohol production in Argentina; and electric power generation in the Dominican Republic. Seaboard also has an equity method investment in Butterball, LLC (“Butterball”), a producer and processor of turkey products. [5]

The Business operates six segments, which are outlined as follows:

  • Pork Segment: This segment operates a vertically integrated pork producer that principally produces and sells pork products to distributors, foodservice operators, grocery stores and further processors, with the purchasers of said products being located globally. In conjunction with these operations, there are also 50% noncontrolling interests in pork processing plants, and producers of raw and pre-cooked bacon products. And finally, in addition to the aforementioned esculent-pork-operations, this segment also uses pork fat (supplied by the Company’s own pork processing plant), animal fats and vegetable oils (both purchased from third parties), to produce biodiesel.
  • CT&M Segment: This segment is an integrated company specializing in agricultural commodity trading, processing and logistics; all of which involves the utilizing of vessels owned by the segment. CT&M has facilities situated in over a couple dozen countries, primarily in Africa and South America.
  • Marine Segment: This segment provides cargo shipping services in the U.S., The Caribbean and Central and South America.
  • Sugar and Alcohol Segment: This segment operates a vertically integrated sugar and alcohol production facility in Argentina with the end products primarily being marketed locally (with some foreign business occurring also), typically to industrial users and to certain oil companies under the Argentine governmental bioethanol program, which requires alcohol to be blended with gasoline. This segment also owns a 51-megawatt cogeneration power plant, fuelled by the burning of sugarcane by-products, natural gas and other biomass items such as woodchips.
  • Power Segment: This segment is a producer of power generating electricity for the Dominican Republic power grid, utilizing natural gas or heavy fuel oil to do so.
  • Turkey Segment: This segment constitutes a 52.5% noncontrolling interest in a producer, and processor of conventional and antibiotic-free turkey products, with the end customers primarily being industrial entities, foodservice outlets, and retail stores.

The Company also has other business whereby through a subsidiary called Mount Dora Farms, Inc., they process jalapeño peppers at its plant in Honduras, which are primarily shipped to and sold within the U.S.

This Security Issue came to our attention at the price of approximately 3,560.72 during late-June 2023, with drafting of this Piece beginning relatively soon after. At the time it initially piqued our interest for several reasons, including:

  • The Company’s low P/E ratio
  • The Company’s low P/BV ratio
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5
  • The Company’s current ratio
  • The Company’s previous earnings consistency and stability
  • The Company’s cash dividend payments

Our Suspected Valuation at First Glance: Possibly ‘Gold’

 

Company Financials

All of the discussions below are based on the data presented in the Company’s SEC filings [3 – 23].

Table 2 – 1 below shows the Company’s annual net income and diluted earnings per share, alongside their three-year averages:

Table 2 – 2 below shows data extracted from SEB’s most recently published SEC filing (10-Q) [3] regarding their balance sheet:

Using the information presented in the table above (Table 2 – 2) we have constructed a new table below (Table 2 – 3), consisting of the discernible tangibles which we here find more useful. We have included the values of these assets as stated on the balance sheet, alongside three liquidation values i.e., their ‘realizable value’ as presented in ‘Security Analysis’ (pg. 560) [1]:

Table 2 – 4 below shows how many of the Company’s relative assets and liabilities (as presented in Table 2 – 3) are attributable to each of the Company’s common shares:

 

Initial Discussions Regarding the Company’s Financials

The Issue’s current ratio is 2.56 in accordance with Table 2 – 3, and Table 2 – 4 above, whilst the best, average and worst-case scenarios are 2.23, 2.08 and 1.87 respectively, all of which are above the minimum recommended figure of 1.5. The Issue also passes the acid test in all four instances.

The long-term debt value does not exceed 110% of the net current asset value in any of the four scenarios.

The Company has not demonstrated any losses over the last decade, and it is our opinion that the earnings have been fairly consistent. We believe the five- and 10-year averages can be taken as a reliable indication of the Issue’s previous earning power as opposed to the by-product(s) of a random assortment of numbers.

The Company has an uninterrupted annual dividends streak going back to 2017.

The Company’s most recent annual earnings were larger than those of six years prior; and looking at the three-year averages of our diluted EPS (beginning 2014) we can see that over the latest fiscal decade, the EPS have increase by approximately 71%.

The discernible tangible equity per share is 2,749.88 in accordance with Table 2 – 4 above; and we calculate the best, average, and worst-case scenarios to be 1,362.75, 495.53 and -40.83, respectively. The current price of 3,586.99 is greater than 120% of the first three positive values, with the last one being negative and rendering the 120%-price-paid-to-DTE metric invalid.

 

The following points are for the more-involved investor(s)/shareholder(s); those who view common stock holdings as part-ownerships in an enterprise, irrespective of the short term public valuations, and not merely a tradable certificate “which can be sold in a matter of minutes” [2]. All of the points presented below have been factored into our valuation of this Security Issue here discussed.

Further Discussions Regarding the Company’s Financials

There were four main points we felt warranted further discussion or highlighting here as opposed to a single bullet point under the ‘Additional Observations Regarding the Company’s Filings’ subsection. Here we shall remind the reader that it is up to them and anyone else to whom it may concern, to come to their own conclusions after carefully considering the information they encounter during their own investigative works. We felt that the following four points were to be highlighted but of course some of you may naturally disagree and in your perhaps more, or even less informed opinion may have a different take on the information presented.

Controlled Company

As the title of this subsection suggests, Seaboard Corporation is a “controlled company” as is detailed in their proxy statements. Please see the following excerpt from the 2023 DEF 14A Form:

Seaboard is a “controlled company,” as defined in the rules of the NYSE American, because more than 50 percent of the voting power of Seaboard is owned by the Seaboard Flour Entities. As such, Seaboard is exempted from many of the requirements regarding board of director committees and independence. The members of our Board of Directors who are independent within the meaning of the NYSE American listing standards are David A. Adamsen, Douglas W. Baena and Frances B. Shifman. The remaining members of our Board of Directors are not independent within the meaning of the NYSE American listing standards and, therefore, they would not qualify as independent directors for purposes of serving on a compensation, nominating committee or audit committee under applicable NYSE American committee independence requirements.  The independent directors meet on a regular basis as often as necessary to fulfill their responsibilities, including at least annually in executive session without the presence of non-independent directors and management. [4]

Naturally the next question is “who has ownership and control of the ‘Seaboard Flour Entities’ that were just mentioned?” This is outlined as follows:

Approximately 77% of the outstanding common stock of Seaboard is collectively owned by Seaboard Flour LLC and SFC Preferred, LLC, which are Delaware limited liability companies. Ellen Bresky, the Chairwoman of the Board of Directors, and other members of the Bresky family, including trusts created for their benefit, own the equity interests of Seaboard Flour LLC and SFC Preferred, LLC. [5]

Now how or why is this a problem? It’s not inherently a problematic setup for other investors in the Security Issue, but more so a matter to consider as it essentially means the Company is able to operate more independently than other publicly traded companies i.e., has to comply with less rules and regulations but arguably more importantly, the outcome of shareholder voting matters will very likely and consistently be dictated by the Bresky family. Again, this is not inherently detrimental although it is important for those looking to exercise their voting privileges and have their voice heard as a shareholder, as it could easily be drowned out and any effort(s) to rally up similar shareholders to demand any type of change will very possibly be futile. Depending on the sentimental Bresky ties to the Corporation and proximity however, this may be beneficial for smaller shareholders as there could be extra vested interest towards ensuring the survival and prosperity of SEB. Whichever way you choose to look at it though, we believe the matter one worthy of serious deliberation whilst contemplating investing in this Security Issue.

There are a number of additional issues affiliated with this setup, although they are not causative:

  • An advisory vote on the compensation of the NEOs is conducted every three years as opposed to annually.
  • “The Board of Directors establishes the bonuses for the Named Executive Officers based upon the recommendation of Seaboard’s Chairwoman of the Board, Lead Director and President and a subjective review of Company performance and individual performance” [4, 6, 8], i.e., they lack any clearly defined, quantitative, observable metrics for shareholders to hold them accountable towards.
  • NEOs are approved a number of hours of the Company’s airplane for personal use; and the Company also pays each NEO for the incidental fees and expenses incurred related to the flight(s).
  • NEOs are provided with automobile allowances.
  • There have been a couple of recent DEF 14A Forms detailing delinquency as it pertains to Section 16(a) Reports.
  • There does not seem to be an upper age limit for which Directors can serve the Company’s Board of Directors.
  • When discussing the Independent Auditors’ Fees, the 2017 and 2018 proxy statements show notable ‘all other fees’ paid, but the details of these were seemingly not provided.
  • Over the last decade there were no related party transactions detailed in the DEF 14A Forms, apart from the following which was outlined in the latest Proxy – “Jacob Bresky, Vice President, International of Seaboard Corporation, and now President and Chief Executive Officer, of Seaboard Overseas and Trading Group, is the son of Ellen S. Bresky, director and Chairwoman of the Board. Mr. Bresky’s compensation for his service in his role for fiscal year 2022 was $510,000. He also participates in certain benefit plans of the Company. Mr. Bresky’s compensation was reviewed and discussed in accordance with the procedures set forth above. There were no other related party transactions in excess of $120,000 since the beginning of fiscal year 2022” [4].

In spite of these items however, ultimately the Company is operating at a profit so in this case a little forgiveness can perhaps be afforded; and considering the controlled status of the Company, there is likely not a viable route Shareholders can take to seek recourse which is part of the issue with the entire “controlled company” setup in the first place. Ultimately it is up to each individual to decide where they stand but considering SEB’s continued profitability and seemed growth we would not complain about this too much. But that is just our stance in this instance.

Acquisitions and Diversification

The 2018 and 2019 annual reports have the following detail concerning the Company’s genesis:

Seaboard Corporation was originally founded in 1918 as a flour brokerage business and was organized as a Delaware corporation in 1946. [11, 13]

Considering SEB’s current operations we would say it is rather apparent the Company has evolved far beyond their original state and it appears acquisitions have been a pivotal tool in achieving this. Typically we prefer organic growth but acquisitions are not despised if handled properly, with Ling-Temco-Vought Inc. and NVF Company mentioned in The Intelligent Investor [2] being notable case studies of what to avoid, and it is clear SEB does not resemble these in many ways. In the instance of SEB, whilst the diversification has at times not appeared tangentially related to the core operations, the long-term debt has not skyrocketed, the ratios have not become overtly less conservative, the share price has not suffered huge hikes, and the Company has remained profitable. Some of the operational divergence has been interesting though e.g.:

Seaboard purchased equity interests in limited liability companies that operate refined coal processing plants that generate federal income tax credits. [13].

Which is not related to food & drink in the slightest, but the mention of federal income tax credits could imply that was their target; an interesting and possibly respectable move. And then there was the following acquisition:

During 2020, Seaboard invested $30 million in a financial services company that primarily lends to and invests in debt securities of privately held companies. This long-term investment is classified in “Other non-current assets” on the consolidated balance sheet and is valued at net asset value (“NAV”), adjusted for specific liquidity factors, resulting in level 3 classification. [9]

Which could lead to additional income if handled properly (however, so far there have been inconsistent unrealized gains and losses to do with the Company’s investments) so it seems these are more blatantly strategic as opposed to randomized in a way we cannot comprehend. It is also clear that SEB does not constantly depend on acquisitions for the increases in revenue and income as Management’s discussion does not detail their recent growth to be caused by acquisitions, although a pro-rata version of their financial data would be nice, like that of Central Garden & Pet Company which showcased the earnings had no acquisitions occurred. Concerning the execution of the business combinations, it is not entirely clear how they are funded as that information is not always provided i.e., through cash on hand, proceeds from loans etc. but we can see in some instances that the acquisitions correlate with loan proceeds. Sometimes quotes like the following are provided but this is not the norm:

During the first quarter of 2018, Seaboard’s CT&M segment acquired three flour mills and an associated grain trading business located in Senegal, Ivory Coast and Monaco for total consideration of $324 million, net of cash acquired. The acquisition was primarily funded using proceeds from Seaboard’s short-term investments and the incurrence of a note payable to the sellers. [13]

Penultimately here, we have a list of relevant matters to be aware of:

  • SEB also increases their ownership interests in other entities they have a stake in.
  • Sometimes a considerable amount of the purchase consideration is for goodwill, as opposed to tangible assets.
  • There have been very inconsistent earnings from affiliates, making this area of their income somewhat less predictable, especially has it has extended to losses in some years.
  • They have also disposed of entities also.

And then finally, we consolidation matter:

Principles of Consolidation

The consolidated financial statements include the accounts of Seaboard Corporation and its domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Financial information from certain foreign subsidiaries is reported on a one- to three-month lag, depending on the specific entity. [5]

It does not say their consolidated subsidiaries are wholly-owned and the exhibit listing the subsidiaries fails to state the ownership percentage that SEB maintains. Based on allocated income to noncontrolling interests we see in the financial statements we would say SEB owns the clear majority of their interests so there are no possible stakeholder concerns in a worst case scenario, but this matter should be fully stated in a clear format.

Legal Proceedings

Unfortunately there are a lot of legal proceedings here, the nature of which we will not summate but we will instead show you the entire clippings of their most recent reference, from the latest 10-K Filing or the most recent 10-Q Filing. First we have the Helms-Burton Act Litigation:

Helms-Burton Act Litigation

On July 21, 2021, a lawsuit was filed by an individual, Odette Blanco de Fernandez (“Ms. de Fernandez”), and the heirs (“Inheritors”) and estates (“Estates”) of four of her siblings (Ms. de Fernandez, together with the Inheritors and the Estates being referred to as the “Plaintiffs”) against Seaboard Corporation in the U.S. District Court for the District of Delaware (the “Delaware District Court”), making claims under Title III of the Cuban Liberty and Solidarity Act of 1996, also known as the Helms-Burton Act (the “Act”). The same Plaintiffs filed a separate lawsuit against Seaboard Marine Ltd. (“Seaboard Marine”) on December 20, 2020, in the U.S. District Court for the Southern District of Florida (the “Florida District Court”). The complaints in each lawsuit seek unspecified damages (including treble damages) and pre-filing interest as provided in the Act; pre-judgment interest; attorneys’ fees, costs and expenses; and such other relief as is just and proper.

The Act provides that any person who knowingly and intentionally “traffics” in property which was confiscated by the Cuban government may be liable to any U.S. national who acquires an ownership interest in such property for money damages in an amount equal to the greater of the current fair market value of the property or the value of the property when confiscated, plus interest from the date of confiscation, reasonable attorneys’ fees and costs, and treble damages under certain circumstances. The complaint in each of the cases alleges that the Plaintiffs acquired ownership interests to a 70-year concession to develop port facilities at Mariel Bay, Cuba, and ownership of surrounding land, and that these and other property rights were confiscated by the Cuban government in 1960. The complaints further allege that Seaboard Corporation and Seaboard Marine knowingly and intentionally “trafficked” in the confiscated property within the meaning of the Act by carrying and/or directing cargo to the Port of Mariel.

The Florida District Court in the Seaboard Marine case dismissed the claims of the Inheritors and the Estates because they did not acquire the ownership claims prior to March 1996, as required by the Act. The remaining plaintiff, Ms. de Fernandez, contends she owns 20% of the companies that were granted the concession and owned land in or around Mariel Bay, Cuba. On August 19, 2022, the Florida District Court granted Seaboard Marine’s Motion for Summary Judgment and entered a Final Judgment (the “Summary Judgment”) in favor of Seaboard Marine. On September 1, 2022, the Plaintiffs appealed the Summary Judgment to the United States Court of Appeals for the Eleventh Circuit (“Appeal”). The Plaintiffs’ appeal is pending.

As to the suit against Seaboard Corporation, on October 21, 2021, the Plaintiffs filed an amended complaint which principally added allegations that there were other callings made by Seaboard Marine at the Port of Mariel and that Seaboard Corporation engaged in a pattern of doing business with individuals and entities in contravention of U.S. foreign policy. Seaboard Corporation filed a Motion to Dismiss which is pending. On September 28, 2022, the Delaware District Court stayed this lawsuit against Seaboard Corporation until 30 days after the outcome of the appeal in the Seaboard Marine case.

On March 24, 2023, the Plaintiffs, Seaboard Marine and Seaboard Corporation entered into a settlement agreement to settle the cases against Seaboard Marine and Seaboard Corporation for an immaterial amount that is contingent on the Florida District Court granting an Agreed Motion to Vacate the Summary Judgment entered in favor of Seaboard Marine on August 19, 2022. [3]

Then we have the Cereoil and Nolston Litigation:

Cereoil and Nolston Litigation

On March 20, 2018, the bankruptcy trustee (the “Trustee”) for Cereoil Uruguay S.A. (“Cereoil”) filed a suit in the Bankruptcy Court of First Instance in Uruguay that was served during the second quarter of 2018, naming as parties Seaboard Corporation and its subsidiaries, Seaboard Overseas Limited (“SOL”) and Seaboard Uruguay Holdings Ltd. (“Seaboard Uruguay”). Seaboard Corporation has a 45% indirect ownership of Cereoil. The suit seeks an order requiring Seaboard Corporation, SOL and Seaboard Uruguay to reimburse Cereoil the amount of $22 million, contending that deliveries of soybeans to SOL pursuant to purchase agreements should be set aside as fraudulent conveyances. Seaboard believes that it has meritorious defenses to the claims alleged in this matter and intends to vigorously defend this matter. It is impossible at this stage to determine the probability of a favorable or unfavorable outcome resulting from this suit. In the event of an adverse ruling, Seaboard and its two subsidiaries could be ordered to pay the amount of $22 million plus interest. Any award in this case would offset against any award in the additional case described below filed by the Trustee on April 27, 2018.

On April 27, 2018, the Trustee filed an additional suit in the Bankruptcy Court of First Instance in Uruguay that was served during the second quarter of 2018, naming as parties Seaboard Corporation, SOL, Seaboard Uruguay, all directors of Cereoil, including two individuals employed by Seaboard who served as directors at the behest of Seaboard, and the Chief Financial Officer of Cereoil, an employee of Seaboard who also served at the behest of Seaboard (collectively, the “Cereoil Defendants”). The Trustee contends that the Cereoil Defendants acted with willful misconduct to cause Cereoil’s insolvency, and thus should be ordered to pay all liabilities of Cereoil, net of assets. The bankruptcy filing lists total liabilities of $53 million and assets of $30 million. Seaboard believes that it has meritorious defenses to the claims alleged in this matter and intends to vigorously defend this matter. It is impossible at this stage to determine the probability of a favorable or unfavorable outcome resulting from this suit. In the event of an adverse ruling, Seaboard Corporation and the other Cereoil Defendants could be ordered to pay the amount of the net indebtedness of Cereoil, which based on the bankruptcy schedules would total $23 million. It is possible that the net indebtedness could be higher than this amount if Cereoil’s liabilities are greater than $53 million and/or Cereoil’s assets are worth less than $30 million.

In addition, in the event of an adverse ruling, the Bankruptcy Court of First Instance could order payment of the Trustee’s professional fees, interest, and other expenses. Any award in this case would offset against any award in the case described above filed on March 20, 2018.

On September 30, 2021, HSBC Bank (Uruguay) SA (“HSBC”), a creditor in the Cereoil bankruptcy proceeding pending in Uruguay, filed a suit in the U.S. District Court for the District of Kansas (the “Kansas District Court”) against Seaboard Corporation alleging claims for breach of contract, promissory estoppel, breach of the duty of good faith and fair dealing, unjust enrichment, fraud, negligent misrepresentation and fraud by concealment based upon a comfort letter, alleged statements by Cereoil personnel (including the Chief Financial Officer serving at the behest of Seaboard), and the same grain transactions that the Trustee challenges as fraudulent conveyances in the Cereoil bankruptcy in Uruguay discussed above. HSBC seeks $10 million plus interest and other relief in excess of $3 million. In March 2022, Seaboard filed a motion to dismiss HSBC’s claims on various grounds. On September 23, 2022, the Kansas District Court dismissed six of HSBC’s seven claims. Three of those claims, for fraud, negligent misrepresentation and fraud by concealment, can be refiled by HSBC in Uruguay. The other three claims, for breach of contract, breach of the duty of good faith and fair dealing and unjust enrichment, were dismissed with prejudice and cannot be refiled unless HSBC successfully appeals the Kansas District Court order. The one claim not dismissed in this matter is for promissory estoppel. Seaboard believes that it has meritorious defenses to this claim and intends to vigorously defend it. It is impossible to determine the probability of a favorable or unfavorable outcome resulting from this remaining claim.

On May 15, 2018, the Trustee for Nolston S.A. (“Nolston”) filed a suit in the Bankruptcy Court of First Instance in Uruguay that was served during the second quarter of 2018, naming as parties Seaboard and the other Cereoil Defendants. Seaboard has a 45% indirect ownership of Nolston. The Trustee contends that the Cereoil Defendants acted with willful misconduct to cause Nolston’s insolvency, and thus should be ordered to pay all liabilities of Nolston, net of assets. The bankruptcy filing lists total liabilities of $29 million and assets of $15 million. Seaboard believes that it has meritorious defenses to the claims alleged in this matter and intends to vigorously defend this matter. It is impossible at this stage to determine the probability of a favorable or unfavorable outcome resulting from this suit. In the event of an adverse ruling, Seaboard and the other Cereoil Defendants could be ordered to pay the amount of the net indebtedness of Nolston, which based on the bankruptcy schedules, asset sales and removal of duplicative claims, is estimated to be approximately $8 million. In addition, in the event of an adverse ruling, the Bankruptcy Court of First Instance could order payment of the Trustee’s professional fees, interest, and other expenses. [3]

Then we have the Pork Price-Fixing Antitrust Litigation:

Pork Price-Fixing Antitrust Litigation

On June 28, 2018, twelve indirect purchasers of pork products filed a class action complaint in the U.S. District Court for the District of Minnesota (the “Minnesota District Court”) against several pork processors, including Seaboard Foods LLC and Agri Stats, Inc., a company described in the complaint as a data sharing service. The complaint also named Seaboard Corporation as a defendant. Additional class action complaints with similar claims on behalf of putative classes of direct and indirect purchasers were later filed in the Minnesota District Court, and three additional actions by standalone plaintiffs (including the Commonwealth of Puerto Rico) were filed in or transferred to the Minnesota District Court. The consolidated actions are styled In re Pork Antitrust Litigation. The complaints allege, among other things, that beginning in January 2009, the defendants conspired and combined to fix, raise, maintain, and stabilize the price of pork products in violation of U.S. antitrust laws by coordinating output and limiting production, allegedly facilitated by the exchange of non-public information about prices, capacity, sales volume and demand through Agri Stats, Inc. The complaints on behalf of the putative classes of indirect purchasers also assert claims under various state laws, including state antitrust laws, unfair competition laws, consumer protection statutes, and common law unjust enrichment. The relief sought in the respective complaints includes treble damages, injunctive relief, pre- and post-judgment interest, costs and attorneys’ fees. On October 16, 2020, the Minnesota District Court denied defendants’ motions to dismiss the amended complaints, but the Minnesota District Court later dismissed all claims against Seaboard Corporation without prejudice.  On March 3, 2023, the Minnesota District Court granted the Plaintiffs’ Motions to Certify the Classes with respect to all three classes.

Additional standalone plaintiffs filed similar actions in other federal courts throughout the country, several of which name Seaboard Corporation as a defendant. These actions have been conditionally transferred to Minnesota for pretrial proceedings pursuant to an order by the Judicial Panel on Multidistrict Litigation. The states of New Mexico and Alaska have filed civil cases in state court against substantially the same defendants, including Seaboard Foods LLC and Seaboard Corporation, based on substantially similar allegations.

Seaboard believes that it has meritorious defenses to the claims alleged in these matters and intends to vigorously defend these matters. It is impossible at this stage either to determine the probability of a favorable or unfavorable outcome resulting from these suits, or to reasonably estimate the amount of potential loss or range of potential loss, if any, resulting from the suits. However, the outcome of litigation is inherently unpredictable and subject to significant uncertainties, and if unfavorable, could result in a material liability. [3]

Then we have the Pork Compensation Antitrust Litigation:

Pork Compensation Antitrust Litigation

On November 11, 2022, three employees of pork or beef processing plants filed a class action complaint in the U.S. District Court for the District of Colorado, individually and on behalf of all other employees at such plants (the “Class”), against several pork and beef processors and their subsidiaries and related companies, including Seaboard Foods LLC (“Defendants”). The complaint alleges, among other things, that beginning in January 2014, the Defendants conspired in violation of antitrust laws to fix and depress the compensation paid to the Class by, among other things, participating in third-party compensation surveys and exchanging wage-related information through a third-party benchmarking service.  The relief sought includes treble damages, injunctive relief, pre- and post-judgment interest, costs and attorneys’ fees.

Seaboard believes that it has meritorious defenses to the claims and intends to vigorously defend them. It is impossible at this stage either to determine the probability of a favorable or unfavorable outcome resulting from the suit. [3]

Then we have the following subpoenas:

On September 18, 2014, and subsequently in 2015 and 2016, Seaboard received a number of grand jury subpoenas and informal requests for information from the Department of Justice, Asset Forfeiture and Money Laundering Section (“AFMLS”), seeking records related to specified foreign companies and individuals. The companies and individuals as to which the requested records relate were not affiliated with Seaboard, although Seaboard has also received subpoenas and requests for additional information relating to an affiliate of Seaboard. During 2017, Seaboard received grand jury subpoenas requesting documents and information related to money transfers and bank accounts in the Democratic Republic of Congo and other African countries and requests to interview certain Seaboard employees and to obtain testimony before a grand jury. Seaboard retained outside counsel and cooperated with the government’s investigation. There has been no further communication from AFMLS for more than 18 months and to the knowledge of Seaboard, there has been no further action taken by AFMLS. As such, unless further communication is received from AFMLS or action is taken by AFMLS, disclosure of the matter described in this paragraph will not appear in Seaboard’s future SEC periodic reports. [11]

And finally, we have the following issue search warrants.

On September 19, 2012, the U.S. Immigration and Customs Enforcement (“ICE”) executed three search warrants authorizing the seizure of certain records from Seaboard’s offices in Merriam, Kansas and at the Seaboard Foods employment office and the human resources department in Guymon, Oklahoma. The warrants generally called for the seizure of employment-related files, certain e-mails and other electronic records relating to Medicaid and Medicaid recipients, certain health care providers in the Guymon area, and Seaboard’s health plan and certain personnel issues as part of an investigation led by the U.S. Attorney’s Office for the Western District of Oklahoma. This matter was settled in November 2018 pursuant to a settlement agreement with ICE and the State of Oklahoma to which Seaboard made cash payments to ICE and the State of Oklahoma in the aggregate amount of $1 million. The settlement resolves the investigation. [13]

Clearly there’s a legal proceedings trend, which considering the size and diversification of the Business is perhaps to be expected. Either way our aim is to let matters be known, an objective we have just satisfied and ultimately how the individual feels about the frequency and nature of these cases (from both a financial and moral standpoint) is up to them.

Depreciation and Amortization Charges

SEB has not elucidated on where the depreciation and amortization charges are accounted for on the income statement, charges which according to the consolidated statements of cash flows are of the same order of magnitude as the net income. We acknowledge the likelihood of them being factored in but it is good practice to either delineate these charges on the income statement or have some type of explanatory note elsewhere in the 10-K Filings outlining where the charges are embedded e.g., ‘cost of sales’, or ‘selling, general and administrative expenses’ etc. Their location should perhaps thus be queried with Management, and if an explanation is not provided or it comes to light that they were not sufficiently deducted, considering the aforementioned similar order of magnitude as the net earnings, it would imply or blatantly expose that SEB’s net income is over-stated which would significantly impact any likely calculated valuation concerning this Security Issue, be it by us or anybody else. Now as far as the depreciation methodology goes, the Company has said assets are depreciated using the straight-line method over the estimated useful lifetimes of the assets which are as follows: ‘land and improvements’ is 3-15 years since fiscal 2015, prior to which it was 0-15 years; ‘buildings and improvements’ is 30 years and has been throughout all of our sampled 10-K Filings; ‘machinery and equipment’ is 3-20 years and has been throughout all of our sampled 10-K Filings; ‘vessels and vehicles’ is 3-18 years and has been throughout all of our sampled 10-K Filings; ‘office furniture and fixtures’ is 5 years and has been throughout all of our sampled 10-K Filings; and ‘contract growers’ is 5-15 years and has been in all of the 10-K Fillings it is present. We’d prefer if exact values were given over ranges as ranges possibly allow the obscuring of clarity if adjustments are made, but apart from that we do not have any other commentary on the depreciation methodology.

Additional Observations Regarding the Company’s Filings

Points we feel may be considered neither positive nor negative

  1. We would say the primary operations of the Company are typically easy for the layman to understand, although they are rather diversified and some of their affiliate operations for instance may not be so easy to fully understand.
  2. The Company may have recently completed a business cycle trough.
  3. The Company is not overly conservatively capitalized so may make for an interesting speculative purchase in this regard.
  4. We do not here suspect any corporate pyramiding, although on account of the acquisitions and the operational diversification we can acknowledge why some may to a degree suspect corporate pyramiding.
  5. We would not say we noted any recurring non-recurring charges persisting although there have been some notable fiscal items:
    1. “Included in net earnings attributable to Seaboard for 2014 is a gain on sale of controlling interest in subsidiary of $40 million, net of taxes ($66 million gain before taxes), or $34.14 per common share” [15].
    2. “The valuation of the noncontrolling interest was immaterial. Goodwill primarily represents the assembled workforce. Seaboard recorded a gain of $4 million in bad debt expense within selling, general and administrative expenses in the consolidated statement of comprehensive income, related to recognizing the fair value of its pre-existing affiliate receivables. During the fourth quarter of 2018, Seaboard acquired the remaining 2% for minimal consideration” [13].
    3. “During the year ended December 31, 2021, certain immaterial reporting units recorded a total of $4 million of impairment charges. Based on the annual qualitative assessments conducted by the remaining reporting units, there were no other impairment charges recorded” [7].
    4. “Operating income for the CT&M segment decreased $57 million for the year ended December 31, 2021 compared to 2020. The decrease primarily reflected derivative contract losses of $22 million related to the change in mark-to-market adjustments, $18 million of goodwill and property, plant and equipment impairment charges related to plans to dispose of immaterial businesses, and higher selling, general and administrative expenses” [5].
  6. The Company has previously repurchased shares, following on from which the shares in question were retired and deemed authorized but unissued shares. The 2022 report then had the following to say concerning SEB share repurchase programs – “Seaboard’s share repurchase program expired on October 31, 2020. Under this share repurchase program, Seaboard was authorized to repurchase its common stock from time to time. Seaboard repurchased 4,069 shares of common stock during 2020 at a total price of $13 million. Shares repurchased were retired and became authorized and unissued shares” [5].
  7. The net income attributable to the Company typically approximates the same value as the comprehensive income.
  8. There was a recent change in inventory valuation: “During the fourth quarter of 2020, Seaboard elected to change its method for valuing hogs, fresh pork and other inventories in the Pork segment from the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method. Total inventories accounted for under the LIFO method represented approximately 42% of consolidated inventories prior to this change in method. Seaboard believes that the FIFO method is preferable as this method more accurately matches cost of sales with the related revenues than the LIFO method as the FIFO method more closely resembles the physical flow of inventory. Also, the FIFO method results in the inventory at the end of a period consisting of more recently incurred costs. The effects of the change in accounting principle from LIFO to FIFO have been applied retrospectively to all periods presented and certain financial statement line items in Seaboard’s consolidated financial statements were adjusted as necessary. As of January 1, 2018, the cumulative effect of this change on periods prior to those presented resulted in an increase to beginning retained earnings of $23 million” [9].
  9. There are ‘other current assets’ and ‘other non-current assets’ listed on the latest balance sheet, and while there were scattered mentions of some ‘assets’ included in these categories, a full comprehensive breakdown was not provided so we have not been able to account for these in our valuations.
  10. The Company’s outstanding debt is secured in parts but unsecured in others. The secured parts are secured by certain short-term investments.
  11. The interest rates on portions of the debt are notably high.
  12. From what we are able to tell there are no large or concerning payments due in a year or so.
  13. We have not observed any decline in the value of the assets in recent years, be it total asset values or current asset values.
  14. This Company is a “large accelerated filer” in Rule 12b-2 of the Exchange Act, and has consistently been so in all of our sampled 10-K Filings.
  15. ‘Sufficiency of audit evidence over net sales’ has been a critical audit matter for the last three 10-K Filings.

Points we feel may be considered negative

  1. The ‘earnings before income taxes were as follows’ portion of the 10-K Filings, shows that in spite of the overall profitability of the Company, their U.S. operations occasionally lose money prior to income taxes.
  2. The Company’s capital expenditure projections from the previous year lack accuracy. Sometimes the value is over the budget and sometimes it is under the budget but rarely do these give any indication of being reliable, especially consistently. The Company has also provided predictions on when they expect new facilities to be ready, but these predictions have swung either way and there is not enough of them to form a solid conclusion, from what we are able to determine.
  3. A very large number of shares have been authorized, been issued, and are outstanding.
  4. There have been an equal number of year-over-year increases as there have been decreases over the last fiscal decade, and proceeds from loans have contributed towards quite a few of the increases.
  5. The effective tax rates are rather haywire, a contributing factor in considering the predictability of an Issue’s earning power. As far as carryforwards and credits etc. are concerned, the latest 10-K Filing had the following few extracts, detailing where the Company was at:
    1. “As of December 31, 2022, Seaboard had state net operating loss carry-forwards of approximately $181 million and foreign net operating loss carry-forwards of approximately $57 million, a portion of which expire in varying amounts between 2023 and 2042, while others have indefinite expiration periods. As of December 31, 2022, Seaboard had state tax credit carry-forwards of approximately $27 million, all of which carry-forward indefinitely” [5].
    2. “Tax-exempt income is primarily related to federal blender’s credits on the biodiesel that the Pork segment blends. As a result of these credits, Seaboard recognized non-taxable revenue of $79 million, $69 million and $79 million in net sales for the years ended December 31, 2022, 2021 and 2020, respectively. The receivable from the U.S. government was $53 million and $20 million as of December 31, 2022 and 2021, respectively, included in other receivables. The federal blender’s credits are available through 2024” [5].
    3. “Seaboard has certain investments in various entities that are expected to enable Seaboard to obtain certain federal investment tax credits. During 2022, Seaboard invested $52 million in a solar renewable energy project in Guam and received $46 million of federal investment tax credits. Seaboard accounts for this solar investment using the flow-through method and recognized the impact of the investment tax credits in the period earned on a gross basis, with the charge related to the reduction of the investment recorded in other investment income (loss) offset by the benefit of the credits recorded in income tax benefit (expense). Also, Seaboard invested $11 million and $17 million during 2021 and 2020, respectively, in limited liability companies that operated refined coal processing plants that generated federal income tax credits based on production levels. These alternative long-term investments, accounted for using the equity method of accounting, generated in aggregate $46 million, $24 million and $22 million of investment tax credits for 2022, 2021 and 2020, respectively” [5].
  6. The Company makes heavy use of derivative instruments, with some of them at times contributing towards decreases in operating income (derivative contract losses, we are referring to).

Points we feel may be considered positive

  1. The Company has been around for a number of decades, thus has stood the test of time.
  2. Concerning the economic downturn of 2008-2009, the Company profited during both years [24].
  3. There are no customer concentration risks pertaining to a small number of customers, nor there is there a similar risk to do with the Company’s suppliers.
  4. SEB is a relatively large company in terms of consolidated financials.
  5. There is no history of stock splits [25] and we have not observed any notable stock dilution.
  6. There is a very low institutional ownership of the common shares outstanding (14.68% [26] at the time of this Piece’s posting).
  7. The Company has extra assets in the form of ‘investments in and advances to affiliates’ listed on the latest balance sheet(s).
  8. The current asset value exceeds that of all liabilities.

Possible Questions for SEB’s Approximate 3,347 Stockholders to Consider, Investigate and/or Raise with Management

  1. Can the Company re-include their brief history that once was included early on in their annual reports and perhaps add a little further detail?
  2. The ‘earnings before income taxes were as follows’ portion of the 10-K Filings, shows that in spite of the overall profitability of the Company, their U.S. operations occasionally lose money prior to income taxes. Is anything being done to prevent this happening in the future?
  3. When acquisitions occur can the Company include a pro-rata version of their financial data showcasing the earnings had no acquisitions occurred?
  4. Why is the Company so diversified and are they prepared to diversify into any market(s) possible?
  5. If there are acquisitions can the Company always say how they were financed i.e., cash on hand, loan proceeds, debt issuance, issuance/selling of equity/common shares etc.?
  6. Can the Company make clear the ownership interests they have in their consolidated subsidiaries?
  7. Going forward can a full compressive breakdown of all ‘other’ assets (current and/or non-current) be provided in all 10-K and 10-Q Filings?
  8. The research and development costs have recently been increasing year-over-year. Is the Company certain that they are receiving an adequate return on investment from these costs to justify the increases?
  9. Where on the income statement are the depreciation of the fixed assets accounted for?
  10. Can exact estimated useful lives of the depreciated assets be provided as opposed to ranges?
  11. Why have such a large number of shares been authorized? Can any reassurance be provided that these will not eventually dilute Shareholder equity in the near-term future?
  12. Why did the Company remove the region in the 10-K Filings addressing the off-balance sheet arrangements?
  13. Why did the Company recently remove the table under ‘Contractual Obligations and Off-Balance Sheet Arrangements’ header that outlined their upcoming payment obligations?
  14. The Company has had large amounts of long-term debt for some time. Do they plan on gradually eliminating this any time soon?
  15. Why are some of the interest rates for portions of the current debt so high?
  16. Can the Company not pay more in cash dividends to Shareholders on a more consistent basis?
  17. Is any Director or NEO a descendant of the Company’s fonder/co-founders?
  18. There does not seem to be an upper age limit for which Directors can serve the Company’s Board of Directors. Is this the case, and if so, why?
  19. When discussing the Independent Auditors’ Fees, the 2017 and 2018 proxy statements shows that there were large ‘all other fees’ paid, but the details of these were seemingly not provided. Can these be elaborated on, and going forward can these always be detailed?

 

Valuations

The price of this Security Issue at the time of this Piece’s publication is 3,586.99. Using our most recent three-year average of the diluted EPS (411.51) as opposed to the most recent EPS figure (499.66) increased the P/E ratio from 7.18 to 8.72; and using our discernible tangible equity value per share (4,315.21) as opposed to the stated book value per share (2,749.88, in accordance with Table 2 – 2) has increased the P/BV ratio from 0.83 to 1.30. With that in mind and considering current federal interest rates (5.25% at the time of writing), the current price does appear to offer a sufficient margin of safety as per Benjamin Graham’s concept i.e., “over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid” [2]. We should now also remind the reader of some of Graham’s other thoughts regarding the ‘margin of safety’ principle, viz.:

Diversification is an established tenet of conservative investment. By accepting it so universally, investors are really demonstrating their acceptance of the margin-of-safety principle, to which diversification is the companion…It is our argument that a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity provided that the buyer is informed and experienced and that he practices adequate diversification. [2]

Taking our most recent three-year average value of 411.51 for diluted EPS and our stated discernible tangible equity value per share of 4,315.21, and multiplying the corresponding P/E and P/BV ratios of 8.72 and 1.30 respectively, we get a figure of 11.37, which is below Graham’s recommended upper-limit of 22.5 (which in this instance would corroborate with a share price of approximately 5,045.86).

Finally, we can make the following conclusions regarding the original points that initially piqued our interest in the Issue, considering our adjustments:

  • The Company’s low P/E ratio – still valid
  • The Company’s low P/BV ratio – still valid
  • The Company’s ‘P/E * P/BV’ figure being less than 22.5 – still valid
  • The Company’s current ratio – still valid
  • The Company’s previous earnings consistency and stability – still valid
  • The Company’s cash dividend payments – still valid

Whether the current price is reflective of the Company’s future, present and past, in the reader’s opinion is for the reader to decide based upon their own research, however in our opinion this Security Issue appears currently undervalued on account of its current and previous quantitative showing.

Our Valuation: Silver–

The Issued done well relatively well in our ‘Initial Discussions Regarding the Company’s Financials’ section, with the current price being the only main issue. Qualitatively (and further quantitatively) speaking there were no particularly discerning matters either, that is as long as the D&A charges were accounted for on the consolidated income statements. For this Issue to have come in at the next highest valuation of ‘Gold’ it likely would have had to come in at a pricing point of say 2,700-3,300.

At this point in time and all matters here considered, this is a stock pick we would likely follow and would give some consideration towards adding to a stock portfolio given the correct price.

 

References

  1. Graham, B., Dodd, D.L., Security Analysis, (6th edition), (Warren, B.E., Klarman, S.A., Grant, J., Laderman, J.M., Lowenstein, R., Marks, H.S., Merkin, J.E., Berkowitz, B., Greenberg, G.H., Greenwald, B., Abrams, D), McGraw-Hill Education, 2008 – {ISBN 10: 0071592539/ISBN 13: 9780071592536 & ISBN-13: 978-0071592536/ISBN-10: 0071592539}
  2. Graham, B., The Intelligent Investor, (Revised Subsequent Edition), (Warren, B.E., Zweig, J), Harper Business, 2006 – {ISBN-10: 9780060555665 / ISBN-13: 978-0060555665}
  3. SEB’s 1st 2023 quarterly fiscal report (10-Q) – https://www.sec.gov/Archives/edgar/data/88121/000008812123000057/seb-20230401x10q.htm
  4. SEB’s 2023 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/88121/000008812123000032/tmb-20230310xdef14a.htm
  5. SEB’s 2022 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/88121/000008812123000020/seb-20221231x10k.htm
  6. SEB’s 2022 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/88121/000008812122000025/tmb-20220311xdef14a.htm
  7. SEB’s 2021 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/88121/000008812122000017/seb-20211231x10k.htm
  8. SEB’s 2021 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/88121/000008812121000020/seb-20210312xdef14a.htm
  9. SEB’s 2020 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/88121/000008812121000013/seb-20201231x10k.htm
  10. SEB’s 2020 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/88121/000008812120000015/seb-20200313xdef14a.htm
  11. SEB’s 2019 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/88121/000008812120000010/seb-20191231x10k.htm
  12. SEB’s 2019 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/88121/000008812119000015/seb-20190308xdef14a.htm
  13. SEB’s 2018 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/88121/000008812119000011/seb-20181231x10k.htm
  14. SEB’s 2018 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/88121/000008812118000025/seb-20180309xdef14a.htm
  15. SEB’s 2017 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/88121/000008812118000012/seb-20171231x10k.htm
  16. SEB’s 2017 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/88121/000008812117000023/seb-20170424xdef14a.htm
  17. SEB’s 2016 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/88121/000008812117000016/seb-20161231x10k.htm
  18. SEB’s 2016 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/88121/000008812116000049/proxy16.txt
  19. SEB’s 2015 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/88121/000155837016003549/seb-20151231x10k.htm
  20. SEB’s 2015 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/88121/000008812115000003/proxy15.txt
  21. SEB’s 2014 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/88121/000110465915014380/a14-24467_110k.htm
  22. SEB’s 2014 proxy statement (DEF 14A) – https://www.sec.gov/Archives/edgar/data/88121/000008812114000002/proxy14.txt
  23. SEB’s 2013 fiscal annual report (10-K) – https://www.sec.gov/Archives/edgar/data/88121/000110465914013620/a13-23470_110k.htm
  24. https://www.seaboardcorp.com/investors/
  25. https://www.stocksplithistory.com/?symbol=seb
  26. https://www.gurufocus.com/stock/SEB/ownership

 

Throughout this Piece, any mention of a given year’s annual report refers to the 10-K Filing/Annual Report which represents the financial year ended that same year, typically in the calendar month of December, i.e., any mention of the ‘2019 10-K Filing’ or ‘2019 Annual Report’ etc. refers to the 10-K Filing representing the fiscal year ended December 2019. The Filings are usually published a couple months later, the following calendar year.

Throughout this Piece, any mention of a given year’s Proxy Statement refers to the DEF 14A Form/Proxy Statement which accompanied the most recent 10-K Filing, i.e., any mention of the ‘2020 Proxy Statement’ refers to the DEF 14A Form which accompanied the 2019 10-K Filing; usually published not too soon after the 10-K Filing (typically the following calendar month(s) relative to the 10-K Filing’s filing date).

 

Disclaimers and Disclosures – https://wp.me/PcbS4Q-V