BRF Is Already Priced For Peak Margins, With Poultry Cycles Peaking

Core Viewpoint - BRF S.A. has shown significant margin recovery in 2Q24, driven by favorable poultry and pork markets, declining grain prices, and the depreciation of the Brazilian real (BRL) [1][3][4] Financial Performance - BRF's EBITDA margins improved by nearly ten percentage points year-over-year, contributing to a substantial increase in operating income [3] - The company reported revenues of approximately $11 billion year-to-date, with EBITDA margins at 17.5%, leading to an annualized EBITDA close to $2 billion [7] - The net income after taxes is estimated at $940 million, resulting in a price-to-earnings (P/E) ratio of 8x, which is considered low but may not sufficiently cover the expected return [7] Market Dynamics - Grain prices, a key factor in BRF's profitability, have fallen to levels comparable to the 2015-2020 bear market, with expectations of remaining low due to anticipated higher harvests [4] - Global poultry and swine prices have been rising due to supply shortages following a poor 2022/23 cycle, although adjustments in production capacity take time [4] - Strong domestic demand in Brazil, where BRF generates about 40% of its EBITDA, is supported by low unemployment and rising salaries [4] Operational Developments - BRF has gained 57 new exporting licenses year-to-date and expects an additional 40 by the end of FY24, enhancing its market flexibility [5] - The company has achieved approximately BRL 800 million in operating savings from its BRF 2.0 program, although the sources of these savings remain unclear [6] Future Outlook - The current positive cycle may not sustain, as margins are likely to decrease due to rising grain prices and potential oversupply in the poultry and pork markets [2][8] - Long-term average EBITDA margins for BRF are projected at 10.2%, significantly lower than the current margins, indicating potential overvaluation at a market cap of $7.7 billion [7][8]