JBS S.A.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

JBS S.A. is a global food processing company, specializing in the production of meat (beef, pork, chicken, and lamb) and related food products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

JBS operates as a global leader in protein processing, benefiting from scale advantages, and is vertically integrated across much of the meat supply chain. They operate in multiple geographies and have significant relationships with key retailers.

Business Overview

JBS S.A. is a complex, vertically integrated meat-processing conglomerate that operates across numerous regions and a variety of protein types.

  • Geographic Reach: JBS is truly a global business, with significant operations in North America, South America, Australia, Europe, and other parts of the world. This global diversification helps mitigate risks associated with regional economic downturns.
  • Product Diversification: JBS is not just about beef; it is a major player in pork, chicken, and lamb. The company also produces a range of value-added products including packaged meats, frozen foods and ready-to-eat meals, and also has a presence in plant-based protein.
  • Vertical Integration: JBS’s vertical integration strategy from animal production to processing and distribution makes it less dependent on external factors like suppliers and commodity markets while keeping greater control over quality and efficiency.

  • Value Chain: JBS’ operations span across different segments of the value chain including production and processing, sales and marketing and logistics. Their production segment includes cattle, hog, and poultry farming and processing facilities. In the Sales and Marketing segment, JBS sells its products to customers through diverse channels and also operates several distribution centers. The operations in the logistics segment are the support function for their global supply chain.

  • Revenue by segment:
    • Brazil: generated a net revenue of US$22.3 billion in 2023 and is the largest operating segment of JBS with focus on processing and sale of fresh and frozen beef, poultry, pork, and other products. They also manage and control livestock production. It’s worth noting, the Brazilian market is highly competitive and heavily influenced by exports and currency exchange rate.
    • North America: is the second largest operating segment and generated a revenue of US$32 billion in 2023, focusing on the food production and processing market and includes beef, pork and poultry operations. US operations had high levels of demand for their products.
    • Pork USA: had a revenue of US$6.2 Billion in 2023. It focuses on the hog production and pork processing in the US. The Pork USA segment exports a considerable amount of its products.
    • Pilgrim’s Pride: This segment operates globally and generated US$17.6 Billion in 2023. It focuses on the production and sales of chicken, chicken-based products, and related products with a diversified geographical and customer base.
    • Australia: generated a revenue of $US8.8 billion in 2023, and it mainly focuses on sheep and beef production and processing, and has access to large-scale cattle and sheep farms.
    • Europe: had revenues of $US 5.1 billion in 2023. It’s focused on a variety of processed food products with regional preferences. They focus on convenient packaging and high-quality processed foods.
    • Others: Other divisions of JBS are mostly located in South America, and are relatively small.
    • Net revenue: $72.5 billion in 2023.

Industry Landscape and Competitive Positioning

The meat-processing industry is characterized by high competition, volatility in commodity prices, and changing consumer preferences. Despite these challenges, JBS maintains a significant presence in key markets, largely due to its operational scale and diverse product portfolio.

  • Fragmented Markets: The global protein processing market remains highly fragmented with many regional and local players and JBS faces stiff competition from other global players as well as niche regional players.
    • Scale: JBS benefits from scale economies, which provide advantages in terms of sourcing inputs, efficient production and wide distribution network.
    • Vertical Integration: JBS’s integrated value chain reduces their dependence on external players and ensures that it is more efficient than competitors that do not have a vertically integrated supply chain.
  • Customer preferences: There are many emerging trends in customer preferences including demand for sustainable and ethical sourcing of meat, which creates new challenges for legacy players.
  • Commodity Nature: Meat is a commodity, which limits the ability of any one company to significantly differentiate their product. Price is the major competition point.
    • Branding: JBS relies on branding and product differentiation to achieve above-average returns.
    • Changing Consumer Habits: There are strong trends that may negatively impact JBS’s revenue and profitability such as the rise of vegetarianism, increased consumer awareness of health and environment impact, etc.

Financials in Depth

JBS has strong revenue, but its profitability can be affected by the volatility of commodity prices and consumer trends.

  • Revenue Growth: JBS has had impressive growth in revenue. Their revenue increased from US$26.3 billion in 2007 to over US$72 billion in 2023.
  • Earnings: JBS has struggled to generate stable earnings over the recent times, and its net profit margins are low. As you can see from the consolidated statement of income for 2023, their net profit was negative at US$0.5 Billion.
    • In 2022, JBS reported an adjusted EBITDA margin of 9.7% , which was lower than 13.4% in 2021, showing that profitability was negatively impacted due to market conditions and high input costs.

  • Debt: The company has a substantial amount of long-term debt, which is not necessarily a bad thing, but can represent some risk. They hold almost US$15 billion in net debt as of December 31, 2023.

  • Capital Expenditure: JBS requires a large capital expenditure for plant maintenance, acquisitions, and investments. In 2023, they spent $2.8 billion in capital expenditure.

  • Liquidity: JBS has a strong liquidity profile with considerable amount of cash and other current assets. The company’s liquidity is important because its operations require funding through multiple cycles.
  • Cash Flow: Cash flows from operations are usually healthy, but are easily influenced by various working capital items like inventory or receivables.
  • Leverage: They operate with significant leverage, including both current and non-current financial liabilities.

Moat Analysis

  • Intangible Assets (Brands, Patents and Licenses): While some brands (such as Swift and Pilgrim’s) have a strong position in the market, they do not have the brand power that provides a wide moat. JBS does not have any substantial patents or licenses that protect it from competition. Moat: 2/5
  • Switching Costs: In the highly competitive food business, switching costs are very low, preventing JBS to build a very strong moat. Moat: 1/5
  • Network Effects: There are not network effects that JBS benefits from, so they do not have a network-based moat. Moat: 1/5
  • Cost Advantages: Scale and vertical integration provide JBS some cost advantage in sourcing ingredients, production and distribution, and lower costs increase JBS’s margins but this isn’t really a long-lasting competitive advantage. Moat: 2/5 Overall, JBS has a narrow moat resulting from scale advantages and some brand recognition, but their moat isn’t too strong and can be disrupted due to shifting market dynamics. Overall Moat rating: 2/5

Legitimate Risks

  • Commodity Price Fluctuations: The prices of raw materials such as cattle, chicken, and grains are highly volatile, and price changes would impact JBS’s margins significantly.
  • Industry Overcapacity: As an established player, JBS will face a challenge if new players add production capacity or current players ramp up production, because this might cause downward pressure on prices and margins.
  • Food Safety and Animal Health: Scandals or health issues may severely impact JBS’s reputation, revenue, and financial performance.
  • Concentrated Customer Base: A few large retailers account for a large portion of JBS’s revenue. This makes JBS vulnerable to changes in their buying practices.
  • Changing Consumer Preferences: Growing preferences for plant-based proteins, for instance, and health-conscious consumer may limit growth.
  • Regulatory Changes and Trade Barriers: The company is impacted by regulations on animal welfare, environmental rules and trade barriers imposed by governments. Changes in these policies would increase uncertainty and could materially impact financials.
  • Labor Disputes: As most JBS’s production facilities are in areas with unionized workers, labor union disputes and labor strikes would lead to disruption in operations and lower profitability.
  • Economic Slowdowns: Global and regional economic downturns can affect consumer spending on their products. A slow down in economic activity would lead to decreased demand for JBS products, which would impact the revenue and profitability.
  • Geopolitical risks: There are significant geopolitical risks in many of the countries JBS operates in. Political instability could lead to currency fluctuations, trade barriers, and could hurt operations.

Business Resilience

Despite these risks, JBS has shown some resilience through diversification and operational improvements. But it’s important to note that risks related to commodities and consumer sentiments makes its business quite volatile.

  • Operational Flexibility: JBS operates production facilities across different regions and can shift production between regions when markets turn sour. They also have significant investments in the supply chain that creates redundancy and helps them navigate supply-chain disruptions, which helps their resiliency.
  • Diversified Product Portfolio: JBS has diverse portfolio that produces various meats and byproducts that caters to a wide variety of customer tastes. This diverse portfolio gives stability and resilience to business.
  • High Growth Emerging Markets: JBS is a global player and sells its products across the world, which increases their resilience by reducing their dependence on a single market.

Understandability Rating: 2/5

JBS’s business is relatively complex, involving multiple protein types, production, processing and distribution, and various geographic regions and regulatory landscapes that may be difficult to understand for many. The many facets of their business makes it a level two on understandability.

Balance Sheet Health Rating: 3/5

JBS’s balance sheet is reasonably healthy. The company has large debt, but also significant tangible assets. The leverage does raise some concerns about its financial health, especially in the backdrop of volatile market conditions. I’ve rated it as 3/5 because of high amounts of debt and uncertainty of the business environment.